As part of the restoration work, the temple walls will be repaired, a new gate fitted and a wall built around the shrine's precincts, a member of the Rainawari Action Forum, which is spear-heading the project, said.
The temple is being renovated after remaining unattended for the last 22 years.
A New Delhi-based member of the forum said the revival of the temples in Kashmir is a step towards reconciliation between the communities in the Valley and would help instill confidence in Kashmiri Pandits.
"This is another step towards reconciliation and a move to encourage more Pandits to return to the Valley," Rajan Nakhasi told PTI.
Nakhasi, who was born in the neighbourhood, moved to Delhi in the 1990s at the peak of militancy in the Valley.
"I thank the Muslims in Rainawari area for their cooperation in helping restore the temple," he added.
The shrine, which is believed to be the resting place of local deity Vitaal Bhairav, was recently in the news when a conglomeration of several community organisations demanded a CBI probe into the "illegal" sale of the temple land.