I'm no AK builder, but before I modified the receiver, I'd grab another selector lever and see if it has a better fit. Second, try another top cover. If you still have a bad fit, I'd would modify the lever or top cover. Loosening up the hole in the receiver seems like a good way to mess up the functioning of the lever.

 

If the lever is too tight for your desire, try grinding down the surface that the lever rotates on on the inside of the receiver. This is the raised surface that corresponds with the oval dimple. Use a dremel and grinding stone and do just a little at a time and test movement.

 

Most people I know just position the safety arm in the vertical position and apply a bit of outward pressure. This slightly loosens the safety action without using any tools or modifications. I've done this on 10 AKs with success.

 

Thank you guys. I opted to mod the safety selector. Originally I was thinking that removing material will make it look odd. But I pushed dust cover over it and marked how much material to remove. (you can still see scratch there) Only .020" needed to be removed. Took a minute on a belt grinder. Cold blue next and all is done.
Last is to grind safety lever notches. What is correct way? I read some builder use Dremel?

 

Nice work on getting your safety lever to fit. That would have been what I do on my builds. The flared and hooded top covers are easier to work with as far as selector fit.

For your selector notches, there are many ways to do it. I'll just post what has worked for me.

Years ago I bought this diamond bit set from Harbor Freight. Not sure if they still sell it.

I use these bits from it on AKs, AKMs, RPKs or AK-74 notches. One has a round edge, one convex and one flat.

I research what the correct notches for the piece look like and use the pics as a guide. Use a pencil to roughly draw the notches. I clamp a piece of scrap firmly to practice on. I practice a lot using a variable speed Dremel type tool with flexible shaft freehand.

Clamp your work. Then take small cuts with whatever bit or bits I need. It is a bit nerve racking. Just go slow, take a small amount off at a time and smooth out your work area with 600grit or above metal paper.

I'm not saying mine are perfect but they work,

 

I use a double bevel cutter in my mill to do selector notches. you could likely use the same cutter in a drill press if youre careful. Just lock your quill and manipulate the receiver into it by hand, youre only cutting .015-.020" deep notches. Use the scoring from the selector nib as a roadmap for positioning the notch

 

Looks good, @strobes !

 

Wow this one nice looking rifle! Thank you for the idea. I'll look for the same or similar bits on web.
Looks like this is the perfect tool for the job.
Per Komrad Kalashnikov drawings the cutting tool is 15mm diameter should create a 3mm round profile notch , .8 mm dip. with 3mm flat on the bottom.