Red mud, an aluminum production waste, presents a significant industrial waste challenge worldwide. In recent studies, red mud utilization in construction materials and environmental remediation has been explored; however, its applications for improving drilling fluid performance in the oil industry require further investigation. In this study, the feasibility of using red mud as an alternative to calcite in water-based drilling fluids was investigated. Five drilling fluid formulations with varying calcite-to-red mud ratios were evaluated by comprehensive laboratory testing. The optimal performance parameters were determined in terms of rheological properties, gel strength characteristics, and corrosion resistance. Red mud was found to effectively substitute calcite, while maintaining acceptable drilling fluid properties. The pure red mud formulation (sample S2) exhibited a competitive apparent viscosity (25.0 cP) and superior plastic viscosity (23.0 cP) compared to pure calcite (27.5 and 11.0 cP, respectively). Mixed formulations (S3, S4, and S5) afforded optimal cutting transport efficiency with the ratios of yield point to plastic viscosity in the range of 1.00–1.08. To conclude, the results of this study confirmed the potential of red mud as a sustainable and cost-effective alternative that addresses environmental waste disposal challenges, while satisfying the requirements of drilling operation.