Parties in the Chile Congress, including the opposition right-wing coalition, have given their approval in principle to the proposed legislation.
The government announced on Monday that about 4000 families would be compensated.
"The closest relatives of the cruellest cases occurring during the dictatorship will be compensated," Treasury Minister Nicolas Eyzaguirre said.
The announcement came three and a half weeks before the 30th anniversary of the coup on 11 September, 1973. Chileans have taken advantage of the occasion to heal the deep scars left from the 17-year dictatorship.
More than 3000 suspected opponents of Augusto Pinochet's regime were murdered or disappeared under detention and are presumed to have been executed.
The proposal would also reduce prison sentences for soldiers who violated human rights on the orders of their superiors and who collaborated with prosecutors. The changes would also make it easier to bring charges against human rights violators.
Pinochet himself has evaded punishment for the crimes carried out during his rule.
Pinochet himself has evaded punishment for the crimes carried out during his rule. In 2001 a Chilean court ruled he should stand trial for covering up human rights abuses. But last year he was declared mentally unfit to stand trial.
The head of the former regime suffers from mild dementia, arthritis and diabetes and has had several mild strokes since 1998.
He has lived largely in seclusion in Chile for the last three years, since attempts to bring him to trial in Spain failed on the grounds of the once dictator's poor health.
Pinochet was detained during a visit to the UK and kept under house arrest until the Spanish application failed. He returned to Chile.