For the first time, visible photoluminescence could be seen in the blue and green regions in Nd₂Zr₂O₇ nanocrystals synthesized by gel combustion at 800 °C. The nanocrystalline nature of samples was confirmed using X-ray diffraction (XRD), and transmission electron microscopy (TEM). The samples were further characterized using Fourier transform infrared spectroscopy (FTIR), diffuse reflectance spectroscopy (DRS). The photoluminescence emissions pointed to the presence of defects related to oxygen vacancies. DFT-based calculations showed that electronic transitions between defect states (which arise due to V¹⁺_O and V²⁺_O defects) and the conduction band, as well as impurity states at the bottom of the CB, can lead to emissions in the green and blue regions. Samples were further annealed at higher temperatures of up to 1200 °C to observe the evolution of defects and its implications for the photophysical characteristics of Nd₂Zr₂O₇. The emission intensity was found to increase with an increase in temperature. The increase in intensity upon annealing at a higher temperature was attributed to a reduction in the concentration of surface defects and cation vacancies as confirmed using positron annihilation lifetime spectroscopy (PALS). Based on positron annihilation gamma-ray coincidence Doppler broadening (CDB) measurements, it was observed that the nature of the defects probed by positrons did not change on annealing but their concentrations significantly changed. This was also reflected in the emission spectra, in which the spectral features remained the same but the intensity increased as the annealing temperature was increased. The value of the direct optical band did not change much either as a function of the annealing temperature, which further supports the trend in the emission spectra. In brief, it can be said that the characteristic emission in Nd₂Zr₂O₇ samples is due to oxygen vacancies, whereas the increase in the emission intensity with temperature is due to a decrease in the concentration of cation vacancies and surface defects, which serve as alternative non-radiative paths.