Since you know that it is a government area encroached by the previous owner, hence it will always be a problem especially if the neighbors are envious about your purchase then they may create problem to you by making a complaint about this encroachment to the authorities concerned. At that time the authorities may swing into action for demolition.

There is nothing wrong in renovating the shoddy interiors but you can decide to leave the encroached built up area as it is without touching it and keep enjoying it  for now at least for another couple of years so that you will become a familiar person with your neighbors hence you may not face problems with the neighbors until you disturb them.

Whatever you may consult an advocate in the local and take his assistance over the proposed demolition or any other aspect that you think of carrying it out now.

- No permission required for minor interior renovation but for the structural and external changes the permission from the society and competent authority is needed. 

- You can take consent of the neighbor before starting the construction work , and the permission of society /association is also needed for major construction. 

- If the said structure is on the common area then you are under obligation to demolish the same. 

Demolish unauthorised constriction done 

get plans approved them carry on construction 

No one can take objection to renovation of interiors. Proceed with development of interiors. 

Legally safest: Demolish unapproved part, get fresh approval, renovate as per approved plan — avoids future legal issues.
Quiet renovation: Risky — neighbors can complain anytime; penalties or demolition may follow.
Demolition cost (Goa, 2025): ₹150–300 per sq.ft depending on structure.

You can do the work quietly 

It is aways advisable to demolish the unauthorized constructions or if not , then not to make investments in it.

If you remove the unauthorised parts then no one can restrain you in making any exterior or interior work in the authorised construction part. 

Dear Sir/Madam, 

The cost of demolition can be confirmed from the local vendors. Regarding renovation and further work, you may consult the local development/municipal authority as well and consult them for permission for demolition/renovation/approval for next plan. It is better to be inside the reasonable limits of the property when renovating/reconstructing so that no legal complexity are faced in future.