Very small spherical nanoparticles (size in the range of 2-5 nm) of Y₂Sn₂O₇ doped with both Ce³⁺ and Tb³⁺ were prepared by the urea hydrolysis of Y³⁺, Sn⁴⁺, Ce³⁺, and Tb³⁺ in ethylene glycol medium at 150 °C followed by heating at 700°C. These nanoparticles exhibit very poor energy transfer between Ce³⁺ and Tb³⁺ ions and associated luminescence due to the combined effect of centrosymmetric D_3d environment around the lanthanide ions and quenching of the lanthanide ion excited state due to the vibrations of surface hydroxyl groups present on the nanoparticles. However, the energy transfer and associated luminescence can be significantly improved after dispersing the nanoparticles in silica matrix. On the basis of the detailed steady-state and time-resolved luminescence studies, it has been established that a significant amount of Ce³⁺ and Tb³⁺ ions migrate from Y₂Sn₂O₇ host to both the silica matrix and the interface region between silica and Y₂Sn₂O₇ nanoparticles. Improved energy transfer from Ce³⁺ to Tb³⁺ and associated increase in Tb³⁺ luminescence from the nanoparticles dispersed in silica matrix has been attributed to the combined effect of lack of centrosymmetry around the lanthanide ions, removal of hydroxyl groups around the lanthanide ions, and the reduced distance between Ce³⁺ and Tb³⁺ ions at the interface regions between Y₂Sn₂O₇ nanoparticles and silica.