In2O3 nanoparticles are fabricated by a sol–gel method, and annealed under air atmosphere from 400 to 1200 °C. X‐ray diffraction patterns display that all samples are the cubic bixbyite structure, grain size remains nearly unchanged below 700 °C, but remarkable increases from 35 to 72 nm after annealing up to 1200 °C. Electron microscopy also confirms the grain growth during high‐temperature annealing, and the transmission electron microscopy characterizes good crystallinity inside the grains. Raman spectroscopy indicates that the crystallinity of annealed samples is improving and the concentration of oxygen vacancies is decreasing with the increase in annealing temperature. Positron annihilation lifetime measurements identify that there are a large number of monovacancies and vacancy clusters on the surface of nanoparticles. With the increase in annealing temperature, the monovacancies keep a slight recovery and their concentration increases, but the vacancy clusters become smaller vacancies and their concentration decreases. Room‐temperature ferromagnetism exists in the samples after annealing at 400–1000 °C, and the magnetization decreases gradually with the increase in annealing temperature, which is in coincidence with the recovery of vacancy clusters after annealing. These findings suggest that ferromagnetism in annealed In2O3 nanocrystals might be due to the indium–oxygen vacancy clusters rather than grain size effects.