Iron oxide nanoparticles (INPs) have potential biological, biomedical and environmental applications. These applications require surface modification of the iron oxide nanoparticles, which makes it non-toxic, biocompatible, stable and non-agglomerative in natural and biological surroundings. In the present study, iron oxide nanoparticles (INPs) and chitosan oligosaccharide coated iron oxide nanoparticles (CSO-INPs) were synthesized to evaluate the effect of surface coating on the stability and toxicity of nanoparticles. Comparative cytotoxicity of nanoparticles was evaluated in HeLa (human cervix carcinoma), A549 (human lung carcinoma) and Hek293 (human embryonic kidney) cells by using 3-(4,5-dimethylthiazol-2-yl)-2,5-diphenyltetrazolium bromide (MTT) assay along with flow cytometry study for cell viability, membrane integrity, mitochondrial membrane potential (MMP) and reactive oxygen species (ROS) production. Morphological alteration in nanoparticles treated cells was analyzed by Acridine orange/ethidium bromide double staining and electron microscopy. Synthesized nanoparticles were found to be spherical in shape, well dispersed and stable at various pH values, making them suitable for biomedical and environmental applications. The present study also indicates that the chitosan oligosaccharide coating on iron oxide nanoparticles results in the decrease in cellular damage and moderate ROS production, thereby, significantly decreasing the cytotoxic impact of bare iron oxide nanoparticles.