The Union Cabinet, in a meeting chaired by Prime Minister Manmohan Singh, gave its nod to sign the agreement with Vietnam on Transfer of Sentenced Prisoners.
The pact will be signed by the two countries in a bilateral meeting later.
The agreement allows foreign nationals imprisoned in Indian jails and vice-versa to serve the remainder of their sentences in their native countries.
India has so far singed the agreement with more than 20 countries under the pact and United Kingdom was the first country with which India had signed this agreement in 2004.