The results of fabrication and characterization of atomic structure of nanocrystalline thin layers of Y2O3 in cubic and monoclinic phases is reported. Experimental data demonstrate crystalline ordering in nanocrystalline films with average grain size of ∼ 10–14 nm both for cubic and monoclinic studied structures. Density Functional Theory (DFT) based simulations demonstrate insignificant differences of electronic structure of these phases in the bulk and on the surfaces. Theoretical modeling also pointed out the significant broadening of valence and conductive bands caused by means of energy levels splitting in agreement with experimental data (X-ray photoelectron and photoluminescence spectra). The presence of various intrinsic and extrinsic defects (including surface adsorption of carbon mono- and dioxide) does not promote visible changes in electronic structure of Y2O3 surface for both studied phases. Optical absorption and luminescence measurements indicate insignificant bandgap reduction of Y2O3 nanocrystalline layers and the very little contribution from defect states. Simulation of extrinsic compression and expanding demonstrate stability of the electronic structure of nanocrystalline Y2O3 even under significant strain. Results of comprehensive studies demonstrate that yttrium oxide based nanocrystalline layers are prospective for various optical applications as a stable material.