The cabinet, chaired by Prime Minister Manmohan Singh, accepted 14 of 16 amendments recommended by a select panel of the Rajya Sabha on the proposed Lokpal bill.
Speaking to reporters after the meeting, Minister of State in the Prime Minister's Office V. Narayanasamy said: "We have accepted 14 out of 16 amendments proposed by the select committee... we did not approve two."
He said the PMO will also be under the Lokpal, with some riders related to national security and external affairs.
The bill will now be put to vote in the Rajya Sabha in the budget session, and will also return to the Lok Sabha with the new amendments, Narayanasamy said.
The Lok Sabha had approved the Lokpal bill in 2011, but it got stuck in the upper house. In May 2012, it was referred to the select panel.
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The select panel had recommended delinking of the creation of Lokayuktas from the Lokpal Bill, with several parties contending this would lead to encroachment on the rights of states. The earlier bill had said that the states have to set up Lokayuktas within one year of enactment of Lokpal.
The government turned down two amendments, saying that now officials facing a preliminary probe will be given a hearing, and the Lokpal will have no power to transfer Central Bureau of Investigation (CBI) officials investigating a case referred by it.
The Lokpal will be selected by a panel comprising the prime minister, the speaker and leader of opposition in Lok Sabha, Chief Justice of India, and an eminent jurist, Narayansamy said.
The CBI director will be selected by the prime minister, the leader of opposition in the lower house and the chief justice.
He also said that a person "affiliated with any political party" would not qualify to be a member of the proposed Lokpal.
The new draft also says that charitable institutions aided by the government will also come under the ambit of the anti-graft ombudsman.
The Bharatiya Janata Party (BJP) said the government had no right to approve or reject the amendments under the rules of parliament.
"The government said they have accepted 14 or 16 amendments. It was a Rajya Sabha committee that made the amendments and the bill is a property of Rajya Sabha. The government cannot make any amendment to it according to the rules of parliament," BJP leader Ravishankar Prasad said.
He added that the government's reluctance to accept certain amendments related to the CBI raised questions over the government's intentions, noting of the eight suggestions given, only one was accepted.
Rejecting the new draft of the Lokpal bill, Anna Hazare said he would continue his fight for the Jan Lokpal Bill, prepared by him and some other activists.
"The proposed new draft of the Lokpal bill is useless. We will continue our fight for the Jan Lokpal Bill and force the government to pass it," Hazare told reporters here.
"Such a bill will not benefit the people," he said, adding that he would intensify his campaign in the coming months.
Arvind Kejriwal, who was part of the team that drafted the Jan Lokpal Bill, also criticised the United Progressive Alliance (UPA) government for not coming out with a "strong" Lokpal bill.
"Why should you have any Lokpal? If an agency is created which will not stop corruption, will lead to increased corruption and provide protection to ministers, then what is the point," he told reporters here.
"We were not interested in just the word Lokpal. You can name it anything. The government has not done a favour to the people of the country (by the bill). It is the government's constitutional duty to give a corruption-free regime," he said.
"Half of the ministers of the same cabinet, which passed the bill today, will be in jail if a strong Lokpal comes," alleged Kejriwal.