Zirconia nanocrystals have attracted considerable interest as biolabels, which can be used as probes for medical imaging and biosensor applications. However, zirconia particle agglomeration forms a major limitation to its use for biolabeling. In this backdrop, for the first time, well-separated zirconia nanocrystals were obtained in a Heliotron reactor (PROMES CNRS, France) via the solar physical vapor deposition (SPVD) method. As the raw material target for solar evaporation, zirconia nanopowders obtained via the sol-gel process were used. The luminescence and upconversion luminescence properties of the Sol Gel nanopowders were compared with those of the SPVD nanocrystals. Erbium was chosen as the luminescence center with ytterbium as the sensitizer, and along with these two dopants, niobium was also used. Niobium acts as a charge compensator to compensate for depletion in the charge due to the introduction of trivalent erbium and ytterbium at tetravalent zirconium sites. Consequently, the oxygen-vacancy concentration is reduced, and this results in a significant increase in the upconversion luminescence. The SPVD-prepared samples showed less agglomeration and a fine crystal structure as well as high luminescence, and thus, such samples can be of great interest for biolabeling applications.