The effect of microstructures on the photoluminescence of Er2O3thin films has been systematically studied in this paper. The Er2O3 film was fabricated via reactive sputtering of Er metal in an Ar/O2 atmosphere. The as-deposited thin film contained both amorphous and polycrystalline structures, which showed weak photoluminescence at 1.55 µm. Annealing at an elevated temperature from 650 to 1050 °C in O2 ambient significantly incorporated oxygen into the lattice and strongly promoted crystalline grain growth, which in turn dramatically induced the transaction of photoluminescence from 1.55 µm to 1.541 µm. The ideal large crystal Er2O3 structure with fcc-Er2O3 and bcc-Er2O3 precipitates was obtained by conducting a two-step annealing (650 °C for 5 hours followed by 1020 °C for 2 hours) which resulted in a sharp photoluminescence peak at 1.541 µm. Further significant enhancement of PL at 1.541 µm was achieved via RTA at 1050 °C for 30 seconds to introduce more fcc-Er2O3 precipitates into the bcc-Er2O3 matrix.