Copper oxide (CuO) is a favorable material for photovoltaic application where lattice defects/distortions play a significant role for shaping its optical and several other physical properties. In this study, pristine and lithium (Li) substituted CuO nanoparticle (1.0, 3.0, 5.0 and 7.0 mol% of Li) have been prepared via an eco-friendly and cost-effective sol–gel method and a systematic study on the effect of Li ion substitution has been drawn. The Rietveld refinement results confirmed the Li ion substitution obsessed structural alteration from monoclinic to tetragonal symmetry (C2/c → I4/mmm). It was observed that the C2/c and I4/mmm synchronized phases continues up to 7%. Such structural alteration leads to fascinating optical properties due to destruction of parent phase. Moreover, lithium cations inhibit the crystal growth, which created various types of vacancy/defect states that essentially need to be investigated using SEM, FTIR and Raman spectroscopy. Moreover, we have demonstrated that the native lattice alterations brought by size misalliance amid the host [Cu2+ (0.73 Å)] and the dopant [Li + (0.76 Å)] and the presence of oxygen vacancies created via Li substitution in CuO also results in the increment of deep level emission in photoluminescence spectra. The obtained results confirmed that Li ion substitution remarkably enhance optical properties, making such materials promising for device applications.