The must be calculated considering Basic + DA, as per statute. But some companies do calculate on Gross Salary also. There is no rule as to how much amount has to be allowed, but the general practice is to allow one month's Basic + DA, and in order to claim LTA the employee must proceed on leave for a minimum of 3 days.
The LTA must be given 2 times in the block of 4 years, ie., The employee must produce the proof of travel and other expenses. Wherever he has not produced the bill, Income Tax has to be deducted by your Finance Dept. If you wish so, you may opt to give once a year also, but you can exempt your employee from Tax only once in two years.