Functionalized Fe₂O₃ nanoparticles with low concentrations (1, 3 and 5 wt%) of reduced graphene oxide (rGO) were prepared by the thermal decomposition method. In accordance with X-ray diffraction (XRD), Fourier transform infrared (FTIR), UV-visible, and photoluminescence (PL) spectroscopies, a phase change from hematite (α-Fe₂O₃) to maghemite (γ-Fe₂O₃) was observed upon addition of rGO. The TEM investigation revealed that rGO led to the distortion of the Fe₂O₃ nanocuboid rods into spherical nanoparticles. The functionalized rGO acts as an electron accepter and led to the quenching of the luminescence behavior of Fe₂O₃. The functionalization of Fe₂O₃ with 5% rGO significantly increases its surface area and thus enhanced adsorption of acid blue 113 (AB₁₁₃) from water was achieved. The adsorption studies revealed that 5%rGO/Fe₂O₃ (200 mg) adsorbed 89.6% of AB₁₁₃ (100 mg L⁻¹) within 440 min. In comparison with pure Fe₂O₃, the 5%rGO/Fe₂O₃ also exhibits excellent photocatalytic activity in the degradation of AB₁₁₃ under visible light irradiation.