Gurkhas serving in the Army will now get the same pensions as British soldiers, the Ministry of Defence has announced.
Currently, they receive just a sixth of the average army pension and many ex-Gurkhas say they are left destitute.
But the reforms will not apply to Nepalese soldiers who retired before July 1997, leaving many disappointed.
Defence Minister Derek Twigg also revealed that women could soon serve in the Gurkhas for the first time.
And all Gurkhas will get the same leave entitlements - 30 days a year - as the rest of the Army.
'Right thing'
Mr Twigg told the Commons the reforms were "the right thing to do".
"The improved terms and conditions of service will form the basis for continued Gurkha service in the British Army, which is made possible by the long standing and friendly relations between the governments and peoples of the United Kingdom and Nepal," he said.
But the announcement will not satisfy campaigners who marched on Downing Street demanding equal pensions for all former Gurkhas, not just those who left after 1997.
"This is good news for serving Gurkhas, but not for the Gurkhas who fought in the Second World War and the Falklands"
Major Tikendradal Dewan, from the Brigade of Gurkhas Welfare Society, said the MoD justified the cut off on the grounds that before that date Nepalese soldiers were based in Hong Kong, not the UK.
And Padam Bahadur Gurung, President of the Gurkha Army Ex-Servicemen's Organisation, said: "This is good news for serving Gurkhas, but not for the Gurkhas who fought in the Second World War and the Falklands."
Those who left before July 1997 will still receive on average just £984 a year and some say this leaves them struggling to make ends meet.
But Mr Twigg said satisfying the demands of all ex-Gurkhas was "unaffordable" and would have ramifications right across the public sector.
'Historic day'
Other changes include giving Gurkhas the right to transfer to different units in the Army after five years of service and improving welfare services for their families.
The Chief of the General Staff, General Sir Richard Dannatt, praised the Nepalese troops on what he called a "historic day".
But Liberal Democrat defence spokesman, Willie Rennie MP, said there was still some way to go before all Gurkhas are "truly treated fairly".
Mr Twigg's announcement comes a day after the launch of a union for Commonwealth soldiers serving in the Army.
It was formed amid complaints of widespread racism, unfair treatment and a lack of welfare support, all of which were denied by the MoD.
There are currently about 3,500 Gurkhas serving in the Army and close to 20,000 former soldiers living in Britain and Nepal.
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