AC impedance spectroscopic study was carried out to understand the effect of defects on microstructure and electrical properties of lead-free material system of (Bi0.5(Na0.82-xK0.18Lix)0.5)TiO3 ceramics with x = 0, 0.05, 0.075 and 0.1. XRD has shown co-existence of tetragonal and rhombohedral phases in the specimens. Experimental results show that Li doped BNKT ceramics exhibit higher ferroelectric, dielectric and piezoelectric properties than BNKT ceramics. AC impedance analysis indicates the highest grain resistance in BNKLT specimen with Li content of x = 0.075. Li doped BNKT ceramics with x = 0.075 simultaneously exhibits higher density, ferroelectric, dielectric and piezoelectric properties. The results might be attributed to more uniform microstructures, better homogeneity and less defects in the materials.