A novel and cost-effective approach towards the modification of epoxy matrix has been developed using recycled polyurethane for the first time without sacrificing any of the intrinsic properties of the resin. Polyurethane, recycled from waste foam by glycolysis process (RPU), was found to be very effective in improving the properties of the thermosetting resin based on Diglycidyl ether of bisphenol-A (DGEBA). The effect of the addition of polyurethane on the mechanical and viscoelastic properties was analyzed and the morphological changes with the inclusion of varying concentrations of RPU were examined by High Resolution Transmission Electron Microscopy (HRTEM). All the blends remained transparent, even after curing by a reaction induced phase separation process (RIPS) of the epoxy phase and hence suggests the development of microphase separation and nanostructure formation. The nanoscale morphology is very clear even with 15 phr concentration of the recycled polyurethane. The morphology at high concentration (40 phr) of RPU under HRTEM showed very distinct ordered interpenetrating network (IPN) like formation and a phase in phase morphology. The size of the dispersed RPU particles varied from 32 to 80 nm as the concentration of RPU varied from 15 to 40 phr in the epoxy phase. This is the first report where nanoscale morphology development by viscoelastic phase separation (VPS) process. The tensile strength values varied from 57 MPa for neat epoxy to 68 MPa for the 40 phr blend. The fracture toughness was increased by 83% for the addition of 40 phr RPU. The recycled PU can be considered as excellent low cost reinforcing filler for epoxy resin where strength and modulus of epoxy resin could be improved simultaneously with an increase of fracture toughness. (C) 2017 Elsevier Ltd. All rights reserved.