Methanol can be synthesized from CO₂ and green hydrogen via catalytic hydrogenation, offering a sustainable route for CO₂ utilization. However, the thermodynamic stability of CO₂ and side reactions such as the reverse water-gas shift (RWGS) present challenges in achieving high methanol selectivity and catalyst durability. In2O3 is a promising catalyst for CO₂ hydrogenation, as it suppresses side reactions and enables high methanol productivity. Herein, we report the development of Pd/In₂O₃-ZrO₂ (10-90 In2O3 wt%) catalysts for CO₂ hydrogenation to methanol, focusing on optimizing the amount and form of In₂O₃ to enhance performance. Systematically characterization showed that incorporation of ZrO₂ into the In₂O₃ structure enhances the electronic density and reducibility of In₂O₃, promoting oxygen vacancy formation. As a result, the highest oxygen vacancy concentration is observed at Pd/70In₂O₃-ZrO₂. These vacancies are critical for CO₂ activation, while Pd facilitates H₂ dissociation. In-situ high-pressure DRIFTS analysis confirmed that an increased concentration of oxygen vacancies facilitates methanol synthesis through the formate intermediate, leading to reduced CO selectivity. In summary, the Pd/70In₂O₃-ZrO₂ catalyst demonstrated superior activity compared to previously reported systems, highlighting its potential for efficient and scalable methanol production from CO₂.