Any expenditure of a capital nature incurred in making additions or alteration to the asset is to be added to the cost of acquisition by way of cost of improvement. The additions or alterations which enhance the utility and worth of the capital asset are of capital nature. The following expenditures are considered as forming cost of improvement –

1. construction of boundary wall of an open plot of land or raising the boundary wall.
2. construction on an existing plot of land or making additional construction or raising floors in a building.
3. clearing of encumbrances on a property.
4. getting property vacated from unauthorised occupiers.
5. betterment charges paid to municipality under a Town Planning Scheme.

The expenditure which is deductible in computing taxable income under other heads of income cannot be added as cost of improvement. Also, in cases where the fair market value as on 1.04.1981 is adopted in lieu of the cost of acquisition, only the expenditure on improvements incurred on or after that date is to be considered. The assessee will be entitled to indexation of cost of improvement for the purpose of computing long term capital gains except in case of bonds and debentures.

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