Poly(vinyl alcohol) (PVA)–In₂O₃ (with 1 and 5 wt% In₂O₃ loading) nanocomposite films have been prepared by a solvent-casting technique. The In₂O₃ nanoparticles used in this work were prepared by nonhydrolytic alcoholysis ester elimination reaction of indium acetate in the presence of oleic acid and oleyl alcohol at 220 °C. X-Ray diffraction (XRD) patterns and transmission electron microscopy (TEM) studies indicate that the In₂O₃ nanocrystals obtained in this work are nearly monodisperse, highly crystalline with cubic bixbyite structure without the presence of any other impurity phase. The PVA–In₂O₃ nanocomposite films have been structurally characterized by XRD, Fourier transform infrared (FTIR) and Raman spectroscopy. The results confirm the incorporation of In₂O₃ nanocrystals in the PVA matrix and interactions between In₂O₃ nanocrystals and PVA molecules. The thermal properties of nanocomposite films have been investigated by thermogravimetric analysis (TGA) and differential scanning calorimetry (DSC). The thermo-oxidative degradation temperature of PVA increases with the addition of In₂O₃ nanocrystals and the degree of crystallinity of the PVA matrix decreases in the presence of In₂O₃ nanocrystals in the nanocomposite films. The room temperature sensing characteristics of the naocomposite films have been studied for various gases, namely, H₂S, NH₃, CH₃, CO, and NO. The PVA–In₂O₃ nanocomposite films show maximum sensitivity for H₂S gas with fast response and reversibility. The response mechanism of the nanocomposite films to various gases is also proposed.