But officials said the kite-makers and those flying them would have to follow certain rules to minimise risk to life.
The Supreme Court outlawed the sport in 2005 after several people were killed by glass-coated or metal kite strings.
Basant, which begins on 25 February, is popular with tourists but religious leaders say kite-flying is un-Islamic. The ban will return after the festival.
Officials said the regulations, announced by the government on Thursday, would be presented before the Supreme Court for approval.
kite strings can only be coated with wheat-flour glue, dye and soft, finely-ground glass.
In an attempt to regulate kite-making and kite-flying, the government says it will issue licences to retailers selling kites and strings, and only those dealers and manufacturers who are members of a single association registered under the Companies Act would qualify.
The kite-flying can get very competitive during Basant
Officials said bikers in Punjab had also been told to affix protective antennae on their bikes to protect them against the kite strings.
They said those violating the rules would be punished with imprisonment of up to four years and a monetary fine.
Metal or glass-coated strings help cut the strings of rival kites - the main objective of the sport.
But they can catch unsuspecting bikers across the throat, at times with fatal consequences.
Metal string can also cause short-circuits in overhead power cables, leading to heavy losses for electricity utilities.
The festival, praised by President Pervez Musharraf who often flies down to Lahore to participate, is traditionally held in the second week of February.
But for the last two years, it has been delayed because of the ban. In 2006, the authorities also announced a lifting of the ban for the duration of the festival.
The country's religious parties have traditionally opposed the festival for its supposedly Hindu origin, and have been demanding that it should be banned.
Over the years, the Basant festival has drawn thousands of revellers to Lahore from all over the world.
Even Indian movie stars have started participating in the festival which peaks with an all-night flood-lit kite-flying marathon on the eve of the festival.