Highly transparent Er:YAG ceramics with different Er concentration were fabricated by a solid-state reaction and vacuum sintering method. The optical properties, the microstructure and the upconversion luminescence of the Er:YAG ceramics were investigated. For 3 mm thick samples, the in-line transmittances of the as-fabricated Er:YAG ceramics at the wavelength of 1100 nm and 400 nm were about 84% and 82%, respectively, which was very close to the theoretical transmittance of YAG ceramics. The micrograph of the Er:YAG transparent ceramics exhibited a pore-free structure and the average grain size was about 10 μm. The grain boundary of the ceramics was clean and no secondary phase was detected. When pumped by a 980 nm LD, the strong green and red upconversion luminescences in the Er:YAG ceramics were observed. The different upconversion mechanisms depending on Er concentration in the Er:YAG ceramics were also discussed.