Rare-earth doped YAG nanopowders are widely used as luminescence material because of its technological importance in opto-electronic applications especially for solid state lasers. In this work, YAG and Yb:YAG were prepared by co-precipitation method. The thermal behavior was investigated by differential thermal analysis and thermo gravimetric analysis. The phase formation, elemental analysis, particle size distribution, optical absorbance, fluorescence behavior and morphology of YAG and Yb:YAG nanopowder were analyzed through powder X-ray diffraction technique, energy dispersive X-ray analysis, dynamic light scattering, UV-Vis, photoluminescence spectroscopy, high resolution scanning electron microscopy, high resolution transmission electron spectroscopy respectively. From the optical study, Yb:YAG gives optical absorption at 975 nm and predominant infrared emission at 1030 nm.