President Pranab Mukherjee hailed Kapoor, the third in his family to get Indian cinema's highest award after father Prithviraj Kapoor and brother Raj Kapoor, as a "living legend".
"His contribution to cinema has been manifold and tremendous. He is a true living legend," the President said.
"Shashi Kapoor is the third person to win the Dada Saheb Phalke award from his family, the others being Prithviraj Kapoor and Raj Kapoor. My compliments to the family, which has given so much to Indian cinema," Mukherjee said while wishing the actor good health and life.
"The contribution of his illustrious family to Indian cinema is immense and Shri Shashi Kapoor has played a unique part by producing a number of meaningful films as well as performing in well-known international productions," Jaitley said.
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Kapoor, 77, will be given the trophy at his home by the government. His colleagues from the industry like Amitabh Bachchan, Sharmila Tagore and Shabana Azmi paid him a tribute in a documentary on the actor's life. The video had voice-over by the young star from the family, Ranbir.
One of the first actors to venture into international cinema through Merchant-Ivory productions, Kapoor fulfilled his father's dream by establishing Prithvi Theatre.
Making his debut with 'Dharmputra' in 1961, Kapoor went on to deliver hits like 'Char Diwari', 'Deewar' and 'Jab Jab Phool Khilen'.
His international films include 'The Householder', 'Shakespeare Wallah', 'Bombay Talkies', co-starring wife Jennifer Kendal, 'Siddhartha' and 'Heat and Dust'.