The unreleased title, made in 1988, was languishing in the archives of the Directorate of Film Festivals.
Zee Classic with its brand proposition 'Woh Zamaana Kare Deewana' today announced the theatrical release of the movie.
The plot of the film, which features veteran actors such Naseeruddin Shah and Shabana Azmi, is based on Gulzar's own short story 'Seema' from his 'Raavi Paar' collection.
The story revolves around theatre director Sudhir (Shah) and his actor wife Seema (Azmi). Their life appears picture perfect, but appearances are often deceptive in the world of showbiz.
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The music has been composed by one of Gulzar's frequent collaborators, R D Burman.
"Libaas" was produced by Vikas Mohan, whose dream will realised by his sons Amul Vikas Mohan and Anshul Vikas Mohan.
Amul told PTI, "I'm lucky to be a part of this project. It couldn't be released at that time for some reason. This was my father's life-long dream and I'm happy it's finally coming true.
"The film will be in theatres by the end of this year. We will announce the release date in a few weeks, after further discussion."
"Libaas" was shown at the International Film Festival of India (IFFI) in Goa after a gap of 22 years on November 22, 2014. It was also screened at the International Film Festival at Bangalore in January, 1992.
Gulzar, who is celebrating his 83rd birthday today, is one of the most prominent and prolific names in Hindi cinema. Besides being a successful poet and lyricist, he had an active career as a director that began with "Mere Apne" in 1971.
He later went on to direct classics such as "Parichay", "Aandhi", "Mausam", "Angoor", "Ijaazat", "Lekin...", "Maachis" and "Hu Tu Tu".