tl;dr

Yes it's the correct way.

But to be more semantic: Yes, it's the correct way to allow .htaccess to override all directives in the /var/www directory.

As you found out, AllowOverride is allowed only under the Directory section.

Using your example:

<Directory "/var/www">

    AllowOverride All

</Directory>

This is telling apache, that all configurations can be overridden in the /var/www and all its sub-directories (recursively).

For a better example, consider you have the following configuration in your virtual host:

<Directory "/var/www">

    AllowOverride All

</Directory>



<Directory "/var/www/uploads">

    AllowOverride Limit

</Directory>

And the following directory structure:

var/

    www/

        .htaccess

        uploads/

            .htaccess

            a/

                .htaccess

            b/

                .htaccess

        code/

            .htaccess

            c/

                .htaccess

            d/

                .htaccess

What I did here, is create an .htaccess in every sub-directory of the /var/www directory.

^{It usually shouldn't be like so, but this is just for the sake of the example}

Comparing the directory structure with the configuration, it means that all .htaccess files inside in the /var/www folder and its sub-directories, excluding the /var/www/uploads directory and its sub-directories, can override all kinds of directives.

But /var/www/uploads and its sub-directories can only use the .htaccess file to override the Allow, Deny and Order directives.

^{Note: As of apache 2.4 (Which is available by default in 13.10+) the Allow, Deny and Order directives were replaced by a single directive named Require.}