Zirconium dioxide (zirconia) nanoparticle with monoclinic structure is successfully synthesised by chemical route, i.e., pyrophoric method from aqueous solution of ZrOCl2.8H2O and triethanol amine. The structural and optical properties of the annealed samples have been investigated by using X-ray diffractometer, photoluminescence spectroscopy and UV-visible spectrometer. It is observed that the variations of annealing temperature from 650°C to 950°C do not change the structure. However, the crystallite size of zirconia varies from 18 nm to 27 nm and particle size from 10 to 70 nm by annealing the samples. The optical band gap of all the annealed zirconia samples does not vary a lot by the temperature variation in the monoclinic structural phase of zirconia because the crystallite size changes in nanoscale range. The photoluminescence studies clearly states the presence of interstitial and vacancy related defects in nanocrystalline ZrO2. This informs that point defects in form of oxygen vacancies and zirconia vacancies can be introduced in nanocrystalline ZrO2 which is necessary for making these samples efficient for sensor applications.