Infertile couples would be able to seek a surrogate, which must be a relative.
Infertility groups have criticised the proposed law, saying it could lead to an illegal industry.
India is called the "surrogacy hub" of the world, where infertile couples, including many from overseas, pay local women to carry their embryos through to birth.
The industry is estimated to be worth more than $1bn (£65m) a year. But there have been growing concerns over the unregulated business.
`Comprehensive bill`
Foreign Minister Sushma Swaraj told reporters that under the proposed law, only local infertile couples, married for at least five years, would be able to seek a surrogate, who must be a close relative
"This is a comprehensive bill to completely ban commercial surrogacy," she told reporters.
"Childless couples, who are medically unfit to have children, can take help from a close relative, which is called altruistic surrogacy," she said.
Many have criticised the move, saying couples desperate to have children would be left with few options.
"While we need regulations to ensure that no women are forced into surrogacy, an outright ban isn`t logical," fertility expert Archana Dhawan Bajaj told AFP news agency.
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