YPO4 nanoparticles codoped with Eu3+ (5 at. %) and Bi3+ (2-10 at. %) have been synthesized by a simple coprecipitation method using a polyethylene glycol-glycerol mixture, which acts as capping agent. It has been found that the incorporation of Bi3+ ions into the YPO4:Eu3+ lattice induces a phase transformation from tetragonal to hexagonal, and also a significant decrease in Eu3+ luminescence intensity was observed. This is related to the association of the water molecules in the hexagonal phase of YPO4 in which the nonradiative process from the surrounding water molecules around Eu3+ is dominating over the radiative process. On annealing above 800 degrees C, luminescence intensity recovers due to significant removal of water. 900 degrees C annealed Bi3+ codoped YPO4:Eu3+ shows enhanced luminescence (2-3 times) as compared to that of YPO4:Eu3+. When sample was prepared in D2O (instead of H2O), 4-fold enhancement in luminescence was observed, suggesting the extent of reduction of multiphonon relaxation in D2O. This study illustrates the stability of water molecules even at a very high temperature up to 800 degrees C in Eu3+ and Bi3+ codoped YPO4 nanopartides.