This article is from the Crosswords FAQ, by James A. Lundon (jlundon@xstacy.enet.dec.com) with numerous contributions by others.
From Felix Lee (flee@guardian.cse.psu.edu):
&lit stands for "and literally". In non-cryptic crosswords, &lit is
usually attached to clues that are meant to be read two ways: as a
definition, and as a form of wordplay (eg, literally).
In cryptic crosswords, &lit is a term applied to clues where both the
definition and the cryptic parts are the whole clue itself, and not
separate parts of the clue. These clues are usually signalled by a ? or
a ! at the end.
Milk: it tenderly laps it! (6)
is a clue for KITTEN. This is a perfect &lit, since every word is
essential to both the definition and the cryptic.
Perfect &lits are hard to create. Partial &lits seem to turn up more
often:
You'll see nude imp moan horribly here! (11)
is a clue for PANDEMONIUM. The whole clue is the definition, but only
"nude imp moan horribly" is pertinent to the cryptic.
Straighten girth! (5)
is a clue for RIGHT. The whole clue is the cryptic, but only
"straighten" is pertinent to the definition.
From Roger Philips (roger@quantime.co.uk):
A "conventional" cryptic clue may be split into two (or more) distinct
parts, at least one of which is a straight definition of the answer.
For example, in: A person selling things cheaply arranged reductions
(10)
the two parts are a definition of DISCOUNTER: A person selling things
cheaply, and an indication that the answer is an anagram of REDUCTIONS:
arranged reductions
The only difference in an &lit clue is that the two parts are overlaid.
For example, in: I arrange reductions (10)
the definition is the whole clue (the answer is someone who makes
reductions happen), and the cryptic indication is also the whole clue
(the required word is a rearrangement of REDUCTIONS).
The mistake most often made is for part of the clue to contribute to
only one of the readings. To be an &lit clue, the *whole* clue must be
susceptible to two interpretations.
 
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