Co and Mn doped ZnO nanocrystals have been synthesized by two different routes, viz., a wet chemical method and a microwave-assisted nonaqueous method and it has been found that the samples prepared by the former method are ferromagnetic while those prepared through the later route are paramagnetic. Systematic investigation of these doped ZnO nanocrystals has been carried out by extended X-ray absorption fine structure technique to determine the changes in the local structure at the Zn and dopant sites. Co doped samples prepared by either of the techniques show almost similar behavior, with Co substituting Zn up to a 10% doping concentration, beyond which there is a signature of Co clustering. However, in the case of Mn doped samples, Mn clustering commences at lower values of doping ( ~ 7%) for samples prepared by microwave-assisted method, while for nanocrystals prepared by the wet chemical method, Mn−K edge X-ray absorption near edge spectroscopy measurement reveals the presence of a Mn2O3 phase at lower concentration and clustering at higher concentration (>10%). These findings were supported by the results of optical and magnetic measurements on the samples. The experimental results have been further corroborated by first principle calculations. The findings suggest that the origin of ferromagnetic properties in Co doped ZnO nanoparticles prepared by the wet chemical method may be a consequence of surface modification related to the preparation process and not related to bulk properties. The ferromagnetism in Mn doped samples prepared by the wet chemical method can be explained by the presence of a secondary Mn₂O₃ phase. The Mn doped samples prepared by the microwave-assisted method, on the other hand, manifest paramagnetism with a signature of antiferromagnetic interaction due to Mn clustering at relatively lower Mn concentration.