The Indian cabinet agreed at a meeting on Friday to repeal the country's controversial Prevention of Terrorism Act (Pota).
Pota came in after the Indian parliament attack in late 2001
The Congress government - elected in May - has consistently said Pota is misused, particularly against Muslims.
The act was brought in by the Hindu nationalist BJP after an attack on the Indian parliament in December 2001.
Home Minister Shivraj Patil said the Unlawful Activities Prevention Act would be amended to cover terrorism.
Mr Patil told a press conference the government would bring forward an ordinance to withdraw Pota and another to amend the 47-year-old Unlawful Activities Prevention Act.
Critics say that Pota discriminated against Muslims
Mr Patil said one of the main problems with Pota had been that it required the accused to prove their innocence rather than the prosecution to prove guilt.
He said the purpose of repealing the law was to ensure innocent people did not suffer.
He said bail provisions under Pota were also very difficult, resulting in long custodial terms for the accused.
Mr Patil said all pending Pota cases would be reviewed by a committee within one year.
"After one year, everything will come to an end," Mr Patil said.
Pota had come under attack from human rights groups as a draconian measure.
But the Bharatiya Janata Party has defended the law that former Prime Minister Atal Behari Vajpayee introduced after the 11 September 2001 attacks in the US and the attack on the Indian parliament - blamed on Kashmir separatists - the following December.
It has already objected to the withdrawal, saying national security could be compromised.
Pota broadened the scope of the death penalty and gave prosecuting lawyers more scope to detain and interrogate suspects.
Critics say that, following the religious riots in Gujarat state of 2002, Muslims were unfairly singled out.