In this work, we report the simultaneous optimization of the relaxor properties and photoluminescence from nanocrystalline Nd3+ substituted NBT (Na0.5Bi0.5-xNdxTiO3 where x=0, 0.01, 0.02 and 0.04) synthesized by hydrothermal method. Substitution of optically active Nd3+ results in luminescence in addition to the modification of structural and electrical properties of the parent NBT. NBT-Nd ceramics stabilize in a rhombohedral structure which is confirmed by x-ray diffraction analysis. Here, the long-range structure is associated with the removal of local strain inhomogeneity by hydrothermal synthesis. The variation of morphology observed from the transmission electron micrographs is conjectured to be the result of the nucleation process involved with Nd3+ content in hydrothermal process. The Raman spectral measurements concur with the observed rhombohedral symmetry. Upon photo-excitation typical NIR emission from Nd3+ in the NIR region is observed. The variation in the dielectric and the optical properties correlate well with the structural observations for NBT-Nd compositions. © 2017 IOP Publishing Ltd.