DTD has the customisation where you can add these special characters so they are legal. Can the same be done with XML Schema? My research shows XML Schema does not support Entities, hence Entities are enabled through an Internal DTD Subset. Is this true? And does this mean I can use Schema but will also need a DTD to define the special characters?
Correct, named entities can only be declared using a DTD; this functionality is not available through XSD. XSD is all about validation.