Innovations in nanomedicine has guided the improved outcomes for cancer diagnosis and therapy. However, frequent use of nanomaterials remains challenging due to specific limitations like non-targeted distribution causing low signal-to-noise ratio for diagnostics, complex fabrication, reduced-biocompatibility, decreased photostability, and systemic toxicity of nanomaterials within the body. Thus, better nanomaterial-systems with controlled physicochemical and biological properties, form the need of the hour. In this context, smart nanomaterials serve as promising solution, as they can be activated under specific exogenous or endogenous stimuli such as pH, temperature, enzymes, or a particular biological molecule. The properties of smart nanomaterials make them ideal candidates for various applications like biosensors, controlled drug release, and treatment of various diseases. Recently, smart nanomaterial-based cancer theranostic approaches have been developed, and they are displaying better selectivity and sensitivity with reduced side-effects in comparison to conventional methods. In cancer therapy, the smart nanomaterials-system only activates in response to tumor microenvironment (TME) and remains in deactivated state in normal cells, which further reduces the side-effects and systemic toxicities. Thus, the present review aims to describe the stimulus-based classification of smart nanomaterials, tumor microenvironment-responsive behaviour, and their up-to-date applications in cancer theranostics. Besides, present review addresses the development of various smart nanomaterials and their advantages for diagnosing and treating cancer. Here, we also discuss about the drug targeting and sustained drug release from nanocarriers, and different types of nanomaterials which have been engineered for this intent. Additionally, the present challenges and prospects of nanomaterials in effective cancer diagnosis and therapeutics have been discussed.