Present work reports the influence of defects in the form of oxygen vacancies (VO) on ferromagnetic behaviour and photocatalytic activity of yttrium (Y) doped Ce1-xYxO2-δ (where x = 0, 0.02, 0.03 and 0.05) samples. The confirmation of single phase crystalline nature of synthesized samples was carried out using XRD. Raman spectroscopy measurement explained the occurrence of oxygen vacancies as a defect in as-synthesized nanoparticles due to distortion in local symmetry of oxygen ions around cerium (Ce) ions. Furthermore, XPS and Raman measurements indicate the presence of mixed valence states (Ce3+ & Ce4+) that in turn leads to the formation of new networks (Ce3+-O-Ce4+, Y3+-O-Ce4+ and Ce3+-O-Ce3+). Magnetic measurement reveals that ferromagnetic character induced in Y doped ceria that ascends upon increase in doping concentration. The presence of both Ce3+ and VO lead to formation of some localized energy levels which may be responsible for red shift in band gap. Photo-degradation of rose bengal dye in a very short period in the presence of UV-light has been examined in this article. Hence, enhancement in ferromagnetic character and improvement in catalytic behaviour on incorporation of rare-earth ions makes CeO2 an excellent multifunctional material with applications in spintronic devices as well as a catalyst in organic dye degradation.