Cost of improvement will be allowed to be added to the cost of the land. Following points may be noted.
1. If you have incurred cost of improvements in different years, you need to apply different indexation for different costs depending on which year the expenditure was incurred.
2. The best way to show that you have incurred expenditure is to produce bills, if your case is taken out for scrutiny. The bills could be kaccha bills also, if they are genuine.
3. Apparently, you look to be an individual and not a businessman and hence you must not have prepared your Balance Sheet and shown the cost of improvement every year. Never mind, all that you need to show is that you had sufficient cash withdrawals which can justify the expenditure incurred, in those years on the basis of bank statements.
4. Getting valuation done is not an accepted method for showing the cost of improvement. It can only support your claim of cost of improvement in case there is any doubt about the expenditure incurred.
Now let’s come to other exemptions. Since the plot of land is long term capital asset, you will get following exemptions.
a. If this is an agricultural land, you can claim exemption under section 54B by investing capital gains in another agricultural land.
b. If you have only one house at present then you can invest the net consideration in another house property and claim the exemption under section 54F.
c. If you invest the capital gains in three year specified capital gains bonds, you will get full exemption under section 54EC.
It is important to note that, you need to satisfy the conditions mentioned in those specified sections and any non- fulfillment of those conditions will result in withdrawal or non- allowance of exemptions.