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It was one of five public works approved by the People's Council at a meeting on Monday.
The lights and beautification of the lake are expected to provide a fillip to tourism.
Last year the 1,452-meter embankment along the lake was upgraded with dark green concrete slabs and its walking paths were paved with granite.
Hoan Kiem (Sword) Lake, which spreads 12 hectares (30 acres), is named for the legend of a golden turtle god showing up at the lake to take back a sword it had given King Le Loi in the 15th century to help fight Chinese invaders.
Hanoi has been considering its improvements and beautification since 2010.
The other four projects include the widening of two national highways and construction of a new road.
The final one involves building technical infrastructure at the resettlement area in Soc Son District where families living near the Soc Son Waste Treatment Complex, the city's largest, will be moved into.
Chairman of the People's Council, Nguyen Ngoc Tuan, said all the projects play an important role in the city’s economic and tourism development.
