Here, in the present investigation, we have performed detailed structural, optical and magnetic studies on Mn-doped TiO₂ nanocrystals derived by a sol–gel technique. X-ray diffraction (XRD) studies reveal the formation of a single phase tetragonal anatase structure for all the Mn-doped TiO₂ nanocrystals. The X-ray photoelectron spectroscopy (XPS) results suggest the existence of Mn²⁺/Mn³⁺ in the present system and a peak shift towards lower angle ascertains the incorporation of Mn ions into the TiO₂ lattice. Raman peak shifts associated with broadening of peaks validate the XPS and XRD results where the possible existence of any secondary phases is completely ruled out. The size-strain plots, crystallite size estimation and transmission electron microscopy analysis reveal the particle size of the prepared nanocrystals to be in the range 12–14 nm. Functional groups present are identified using Fourier transform infra-red spectroscopy. UV-visible spectroscopy shows a clear visible range absorption illustrating the promising band-gap narrowing and photoluminescence intensity decreases with Mn concentration, which is attributed to the availability of numerous oxygen vacancy centers associated with the present system. All the Mn-doped samples exhibit a clear paramagnetic (PM) behavior at 300 K and the PM contribution increases as the Mn concentration is increased from 3% to 12%. A significant PM contribution with Mn-doped TiO₂ nanocrystals having a different Mn concentration has been studied. To carry out a detailed outlook, the different possible magnetic interactions are considered here and isolated bound magnetic polaron (BMP) formation is proposed to be the reason for the present system exhibiting the PM behavior, where the isolated magnetic spins associated with Mn²⁺/Mn³⁺ in the doped compounds are responsible for the observed PM behavior. Increase in isolated Mn ions increases the possibility of trapping of electrons in the vacancy centers that contribute less towards BMP formation and ultimately leading to a PM ordering. The interesting optical properties and magnetic interactions exhibited by Mn-doped TiO₂ make it a potential candidate for functional devices and applications.