•We propose a tuning of room temperature ferromagnetism by co-doping the In2O3-system through nonmagnetic atoms (Mg).•A new doping process was developed to avoid the formation of magnetic nanoparticles.•The analysis revealed that Fe and Mg ions were incorporated into the In3+ sites in the In2O3 lattice without altering the cubic bixbyite structure.•RTFM ordering with remarkable enhancement of the saturation magnetization with decreasing Fe ions and increasing nonmagnetic Mg concentrations was observed.•The enhancement in the magnetic moment with increasing Mg doping is attributed to oxygen vacancies induced by the substitution of Fe and Mg ions into the In3+. Iron-doped indium oxide is a promising material for spin electronics (spintronics) applications. Herein, an experimental investigation of the effect of adding a nonmagnetic element (magnesium) on the enhancement of the room-temperature ferromagnetism in substitutional iron-doped In2O3 powder was conducted. A new doping process, which avoids the formation of Fe nanoclusters in (In0.85Fe0.15−xMgx)2O3 (x = 0.00, 0.01, 0.03, 0.05) powders, was developed. The resulting powders were characterised by X-ray diffraction (XRD), superconducting quantum interference device, Mössbauer spectroscopy, energy-dispersive spectroscopy, and X-ray photoelectron spectroscopy. The XRD analysis revealed that Fe and Mg ions were incorporated into the In3+ sites in the In2O3 lattice without altering the cubic bixbyite structure. Magnetic measurements indicated the coexistence of ferromagnetic and paramagnetic phases. Room-temperature ferromagnetic behaviour with remarkable enhancement of the saturation magnetisation was observed for decreasing Fe ions and increasing nonmagnetic Mg concentrations. Mössbauer spectra confirmed the coexistence of ferromagnetic (sextet) and paramagnetic (doublet) phases, with a clear effect of Mg concentration. The enhancement in the magnetic moment with increasing Mg doping is attributed to the large defects and oxygen vacancies induced in In2O3 by Fe and Mg co-doping. These results will be useful for the development of Fe-doped In2O3 semiconductor materials for advanced applications.