Any capital expenditure incurred by you or previous owner of the asset for making additions or alteration to such capital asset which enhances the value of the asset or rises it’s price shall be treated as cost of improvement. Any cost of improvement before 1-4-1981 shall be ignored. Now,as per a recent judgement of CIT Vs. K. Raja Gopala Rao 252 ITR 459 (MAD) (2001)], expenses incurred for removing encumbrances (anything that burdens title to the property), will be included in cost of improvement.
Some expenses which can not be taken as cost of improvement are:
Repairs and maintenance expenses;
Any Estate duty paid in case of inherited property;