Minister Nimal Siripala de Silva announced in Parliament that a full bench of the Supreme Court had unanimously ruled that the president could contest to seek a third term.
The court had cleared the way for Rajapaksa to call a snap presidential election after being four years in office, he said.
The opinion of the full bench was endorsed by the nine Supreme Court judges who met at the Chief Justice's room at the Supreme Court yesterday.
Sri Lanka's Constitution was amended in 2010 to scrap a two-term limit, which many believed does not apply to Rajapaksa and would only apply to his successors.
Also Read
Opposition parties backed by former chief justice Sarath Silva has held it was illegal for Rajapaksa to seek a third term as he had been already elected twice.
Following arguments Rajapaksa last week moved the highest court seeking a ruling on his eligibility to seek a third term.
The President made the request in terms of provision 129 (I) of the Constitution.
The presidential election is expected to take place early January.
Rajapaksa came to power in 2005 and won a second presidential term in January 2010, following the defeat of the Tamil Tiger rebels a year earlier.