Dilute magnetic semiconductors based on TiO₂ nanocrystals are the most promising class of materials exhibiting unique optical and magnetic properties. In the present investigation, we have performed a systematic study on the structural, morphological, optical and magnetic behavior of Ni-doped TiO₂, synthesized via a simple, cost-effective sol–gel route. X-ray diffraction patterns together with Raman spectra confirmed the tetragonal anatase phase of Ni-doped TiO₂. High-resolution transmission electron microscopy images indicated the formation of highly crystalline nanocrystals, and the compositional homogeneity of all the samples was confirmed from energy dispersive X-ray fluorescence spectroscopic studies. The functional groups in the samples were identified by Fourier transform infrared spectroscopy. UV-visible and photoluminescence (PL) spectroscopy were performed to provide an insight into the band-gap narrowing in the Ni-doped TiO₂ nanocrystals. X-ray photoelectron spectroscopy results signified the existence of Ti⁴⁺ and Ni²⁺ in all the prepared samples. A decrease in coercivity was observed with Ni substitution, and at lower Ni concentration, the magnetic behavior was attributed to the bound magnetic polarons associated with the oxygen vacancy defects arising during the synthesis procedure. PL analysis revealed the presence of defects in the system and Langevin fitting was employed to estimate the concentration of bound magnetic polarons arising as a result of these defects. The band-gap narrowing and the enhanced magnetic moment observed in Ni-doped TiO₂ reveal the potential of this semiconductor for advanced functional applications such as magneto-optics and spintronics.