Spice by-products, often discarded as waste, represent an untapped resource for sustainable packaging solutions due to their unique, multifunctional, and bioactive profiles. Unlike typical plant residues, these materials retain diverse phytochemicals—including phenolics, polysaccharides, and other compounds, such as essential oils and vitamins—that exhibit controlled release antimicrobial and antioxidant effects with environmental responsiveness to pH, humidity, and temperature changes. Their distinctive advantage is in preserving volatile bioactives, demonstrating enzyme-inhibiting properties, and maintaining thermal stability during processing. This review encompasses a comprehensive characterization of phytochemicals, an assessment of the re-utilization pathway from waste to active materials, and an investigation of processing methods for transforming by-products into films, coatings, and nanoemulsions through green extraction and packaging film development technologies. It also involves the evaluation of their mechanical strength, barrier performance, controlled release mechanism behavior, and effectiveness of food preservation. Key findings demonstrate that ginger and onion residues significantly enhance antioxidant and antimicrobial properties due to high phenolic acid and sulfur-containing compound concentrations, while cinnamon and garlic waste effectively improve mechanical strength and barrier attributes owing to their dense fiber matrix and bioactive aldehyde content. However, re-using these residues faces challenges, including the long-term storage stability of certain bioactive compounds, mechanical durability during scale-up, natural variability that affects standardization, and cost competitiveness with conventional packaging. Innovative solutions, including encapsulation, nano-reinforcement strategies, intelligent polymeric systems, and agro-biorefinery approaches, show promise for overcoming these barriers. By utilizing these spice by-products, the packaging industry can advance toward a circular bio-economy, depending less on traditional plastics and promoting environmental sustainability in light of growing global population and urbanization trends.