Li+ doping is a well-known, simple, yet efficient strategy to optimize the properties of upconverting materials. Nonetheless, the position of Li+ in the lattice and the mechanism of upconversion enhancement are still controversial, especially in Yb3+/Er3+ co-doped Y2O3. This paper presents a comprehensive investigation of the above issues (i.e. the position occupied by Li+ in the lattice and the mechanism of luminescence enhancement, in terms of decreased defects) by studying (Y0.78-XYb0.20Er0.02LiX)2O3 powders. Neutron powder diffraction was employed for the first time in the literature to show that Li+ ions are accommodated in Y sites of YO6 octahedra, confirmed also by the content of oxygen defects, which was increased with the increase of Li+ concentration. FT-IR showed that there was a small change in the amount and the type of the surface-absorbed groups with the increase in the Li+ content, thus not supporting the prevailing conclusion that the quenching groups are decreased by doping Li+. Positron annihilation lifetime (PLAS) experiments showed that the total defect concentration and the large defect clusters, which are considered as quenching centers, are decreased with increasing Li+-content, resulting in the enhancement of the emission intensity in Yb3+/Er3+ co-doped Y2O3.