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What is the best way to update .xml file under webroot\sitecore\shell\Applications folder.
As we can update it from the folder but when we migrate it to new Sitecore version then it will be overriding.
Kindly someone tell me what Sitecore suggests for updating them.
You should put your new file in the \sitecore\shell\override folder.
It is described in this archived doc https://doc.sitecore.com/SdnArchive/Scrapbook/Customize%20an%20XML%20Control.html but that is still valid.
Some extra information: http://chrispauly.blogspot.com/2019/09/override-xamlxml-files-in.html
This will not overwrite the existing files, but note that if you upgrade you will still need to verify if your version is still valid (compare it to the original ones).
For the local development we have added all the customizations in a separate solution project so that they are taken when the build is done. They are also copied when publishing the project. When doing a sitecore upgrade you would need to modify the files only in this project.
For the higher environments we handled this by having an override folder separate from the vanilla instance files. We modified the CI pipeline so that during deploy it will copy the files from the override folder over the vanilla sitecore files. This would also be needed in case you want to only change the .xml file in CM instance only.
