Optical nanomaterials (ONMs) have attracted significant attention of the global research community owing to their several superior advantages. Some of the ONMs depict negligible photobleaching, bright emission, large electron-hole overlap integral, ease of coating on any surface, large Stoke/Antistoke shifts, higher photostabilites, easy to incorporate inside human body etc. These properties make them technologically highly efficient which helps in minimizing the global issue of energy crisis and improving the standard of living of common man. Several aspects of ONMs such as plasmonic nanomaterials, quantum dots, photonic crystals, and rare earth doped nanoparticles have been discussed. For covering various categories of luminescent nanomaterials (LNMs) based on composition, a brief introduction and importance of metal nanoclusters, carbon nano dots, organic-inorganic nanocomposites, and metal doped nanoparticles have been also included. This review article gives very concise overview of rare earth doped oxide nanoparticles covering several important aspects such as rare earth ion (RE) as dopant, oxide-based host, nanophosphors etc. The importance of LNMs, their advantages as well as drawbacks are also highlighted. Technologically important types of RE doped oxide nanoparticles pertaining to downconversion, upconversion, persistence and radioluminescence are also explained and covered in detail in this review article. Several recent applications involving LNMs in bioimaging, solar cell, thermal sensor, biosensor, anti-counterfeiting etc are explained. In the last section of the review, a comparison between nano and bulk rare earth doped oxide LNMs are discussed in terms of several photophysical properties such as dopant local symmetry, Stark splitting, emission intensity, luminescence lifetime, host to dopant energy transfer, quantum yield etc. Finally, this review article is concluded with summary, outlook, challenges, and future scope on the use of LNMs. Several important aspects of LNMs with focus on RE doped oxide nanoparticles have been covered in this review article which will help general readers in their further research, in this important area, for development of both fundamental sciences and applications involving LNMs.