As cities develop and resource demands rise, the water sector faces crucial challenges to deliver reliable, sustainable, and efficient services. Digital Twins (DTs), virtual replicas of physical systems, offer a promising tool to transform how we manage water infrastructure. Originally developed in the aerospace industry, DTs are now gaining traction in the water sector, enabling real-time monitoring, simulation, and predictive control of water and wastewater treatment, collection and distribution networks, and water reclamation and reuse systems. While still emerging in the water sector, DTs have shown potential to enhance operational efficiency, reduce environmental impacts, and support smarter, more resilient water management. This review study provides a comprehensive overview of current DT applications in the water sector, highlighting successful case studies, technical challenges, and knowledge gaps. It also explores how DTs can help bridge the water–energy nexus by optimizing resources utilized across interconnected systems. By synthesizing recent advances and identifying future research directions, this paper illustrates how DTs can play a central role in building sustainable, adaptive, and digitally-enabled water infrastructure.