Metal oxide nanoparticles demonstrate uniqueness in various technical applications due to their suitable physiochemical properties. In particular, yttrium oxide (Y₂O₃) nanoparticle is familiar for technical applications because of its higher dielectric constant and thermal stability. It is widely used as a host material for a variety of rare-earth dopants, biological imaging, and photodynamic therapies. Y₂O₃ has also been used as a polarizer, phosphor, laser host material, and in the optoelectronic fields for cancer therapy, biosensor, and bioimaging. Yttrium oxide nanoparticles have attractive antibacterial and antioxidant properties. This review focuses on the promising applications of Y₂O₃, its drawbacks, and its modifications. The synthetic methods of nanoparticles, such as sol-gel, emulsion, chemical methods, solid-state reactions, combustion, colloid reaction techniques, and hydrothermal processing, are recapitulated. Herein, we also discuss the advantages and disadvantages of Y₂O₃ NPs based biosensors that function through various detection modes including colorimetric, electrochemistry, and chemo luminescent regarding the detection of small organic chemicals, metal ions, and biomarkers.