The natural sources of pigments are accountable for the vibrant and attractive colors in packaging which maintains the quality, safety, and effectiveness of the package. Several natural pigments such as anthocyanin, carotenoids, betalains, and chlorophyll in integration with polymers show different qualitative and quantitative properties in the packaging system. This strong compatibility provides several kinds of enhanced properties (physical, mechanical, and functional) to the package. Because it is non-toxic, it minimizes the adverse effects of synthetic pigments by limiting their ability to migrate to food from the package. In this review, several packaging films, indicators, and sensors formulated from natural pigment sources were effectively found to increase the performance and stability of the package with specific color-changing properties. Along with this the functional properties of the package were also increased due to the presence of several antimicrobial, antioxidant, and bioactive components in pigment sources. Thus, these naturally sourced pigments were effectively used in packaging to monitor pH, temperature, and freshness, as well as to serve as sensors for real-time monitoring of food product quality. Additionally, the review revealed the challenges in terms of compatibility, real-time monitoring, and stability of pigment. As a result, there is a need to explore natural-based colorants, as they are promising substitutes in replacing synthetic pigments. They ensure that the pigment-based packaging fulfils all the safety and environmental requirements making it an ideal choice for packaging solution.