Terbium aluminum garnet (Tb3Al5O12, TAG) ceramics have become a promising magneto‐optical material owing to the outstanding comprehensive performance, including the magneto‐optical, thermal, and mechanical properties. Fine‐grained TAG ceramics with high optical quality and mechanical properties have attracted much attention. In this study, TAG ceramics with fine grains and high optical quality are fabricated successfully by a two‐step sintering method from co‐precipitated nano‐powders. After pre‐sintered at 1525°C in vacuum and hot isostatic pressed at 1600°C, the in‐line transmittance of TAG ceramics reaches 81.8% at 1064 nm, and the average grain size is 7.1 μm. The Verdet constant of TAG ceramics is −179.6 ± 4.8 rad T−1 m−1 at 633 nm and −52.1 ± 1.9 rad T−1 m−1 at 1064 nm, higher than that of commercial Tb3Ga5O12 crystals. The thermal conductivity of TAG ceramics is determined from 25 to 450°C, and the result is 5.12 W m−1 K−1 at 25°C and 3.61 W m−1 K−1 at 450°C. A comparison of mechanical properties between large‐ and fine‐grained TAG ceramics fabricated under different conditions is conducted. The fine‐grained TAG ceramics possess a bending strength of 226.3 ± 16.4 MPa, which is 9.7% higher than that of the large‐grained ceramics. These results indicate that reducing the grain size on the premise of high optical quality helps improve the comprehensive performance of TAG ceramics.