Fragrance encapsulated in small particles of <20 μm diameter is preferred for use in textiles. This study demonstrated that the proper combination of surfactants could produce small and heat-stable emulsion droplets with chitosan that could be spray-dried to produce microcapsules. The microcapsules were able to be deposited onto cotton using water or detergents. It was found that stable emulsion was obtained when Tween 40 and Span 20 were used as compound emulsifiers with the ratio of 4:1 (w/w). The optimum conditions were 1% (w/w) chitosan in acetic acid with the compound emulsifiers of 3–7% (w/w) in the oil, and the inlet temperature for spray-drying was 150 °C. The encapsulation efficiency for orange oil was >90% with a 1:2 (w/w) ratio of oil to chitosan. Microcapsules had a mean diameter of <20 μm and regular particle morphology. The orange oil in the microcapsules was well retained in cotton fabrics after washing in normal detergent solution. The process and products are low in cost, nontoxic, biocompatible, and biodegradable.