An innovative strategy for functional finishing of textile materials is based on the incorporation of a thin layer of surface modifying systems (SMS) in the form of stimuli-sensitive microgels or hydrogels. Since the copolymerization of poly(N-isopropylacrylamide) with an ionizable polymer, such as chitosan, results in a microgel that is responsive to both temperature and pH, the microparticulate hydrogel of poly-NiPAAm-chitosan copolymer (PNCS) was synthesized using surfactant-free emulsion method. The microparticle size in dry (collapsed) state is estimated at 200 nm by SEM and TEM, and effect of temperature and pH on microparticles was investigated by DLS and UV–vis spectrophotometry. The incorporation of PNCS microparticles to cotton material was done by a simple pad-dry-cure procedure from aqueous microparticle dispersion that contained 1,2,3,4-butanetetracarboxylic acid (BTCA) as a crosslinking agent. This application method provided sufficient integrity to coating by maintaining the responsiveness of surface modifying system. The stimuli-responsiveness of modified cotton fabric has been confirmed in terms of regulating its water uptake in dependence of pH and temperature.