A government statement said the cabinet headed by Prime Minister Manmohan Singh decided, at a meeting on Friday, to replace the Prevention of Terrorism Act (POTA) with a new law.
"It is important to note the intention of the government is to protect the rights of people vis-a-vis the misuse of POTA," the statement said, adding the government was fulfilling a promise it made after coming to power in May.
"The (ruling) United Progressive Alliance has been concerned in the manner in which POTA has been misused in the past two years. ... The act will be repealed without compromising in the fight against terrorism," the statement said.
POTA was passed after an attack
on India's parliament in 2001
The earlier Unlawful Activities Prevention Act would now be upgraded to incorporate certain provisions to deal with terrorism, it said.
Home Minister Shivraj Patil, meanwhile, said groups or organisations banned under POTA would remain outlawed but said the scrapped law's replacement would carry milder provisions.
"It will however have provisions to effectively tackle and check the menace of funding of terrorist organisations," he said.
The statement gave one year for all pending POTA cases to be reviewed by a committee.
"After one year everything will come to an end," Patil said.
"It is important to note the intention of the government is to protect the rights of people
vis-a-vis the misuse
Indian Government statement
"Two bills will be introduced in the next session of parliament to replace the two presidential ordinances," Patil said.
POTA was brought into force by the former National Democratic Alliance government after the 11 September 2001 attacks and the raid on the Indian parliament three months later.
Critics said the scrapped legislation was misused by the national and provincial governments to settle political scores as well as to persecute Muslims following sectarian riots in 2002 in the western state of Gujarat.
Soon after Singh came to power in May, his Congress-led coalition promised to scrap POTA while vowing to deal firmly with terrorism.