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The bill seeks to change how transgender people are legally recognised and their right to self-identify.
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The government says the changes will make welfare benefits more accessible and strengthen an existing law against exploitation and trafficking, but critics warn it could exclude many transgender, non-binary and gender-fluid people.
India is estimated to have around two million transgender people, though activists say the true number is higher and legal recognition remains uneven.
The legislation was approved by both houses this week and now needs the president's assent to become law.
In 2014, India's Supreme Court recognised transgender people as a "third gender" and affirmed their right to self-identify.
Despite legal protections, many transgender people in India continue to face discrimination and limited access to education, healthcare and formal employment, often relying on traditional or informal forms of work.
In 2019, the Transgender Persons (Protection of Rights) Act was enacted, aimed at addressing vulnerabilities faced by the community.
Now, the new bill - essentially a proposed amendment to the 2019 law - centres on how a transgender person is defined.
The government says the current definition is too vague and makes it difficult to identify those who are most marginalised.
It argues that a narrower definition will help ensure welfare benefits - such as job reservations and healthcare support - reach those who need them.
It says the changes are intended to protect people facing "extreme and oppressive" discrimination and to prevent exploitation and trafficking.
The bill removes the right to self-identify and instead limits recognition to those defined by biological or physical traits. This includes people with intersex variations - where a person is born with sex characteristics that do not fit typical definitions of male or female - as well as traditional identities long used among transgender communities in India.
The bill also make
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