People with "hidden disabilities" including autism and mental health conditions will become eligible for blue badge parking permits.
From next year, those with less immediately obvious illnesses will have the same right to a badge allowing them to park closer to their destinations as those with physical disabilities, the Department for Transport said.
It said that while the current rules covering the badge scheme in England do not specifically exclude those with non-physical disabilities, they "are open to interpretation" by local authorities and required greater clarity.
Transport Minister Jesse Norman said: "Blue badges are a lifeline for disabled people, giving them the freedom and confidence to get to work and visit friends independently.
"The changes we have announced today will ensure that this scheme is extended equally to people with hidden disabilities so that they can enjoy the freedoms that many of us take for granted."
Those who will be eligible under the changes include:
* Those who cannot make a journey without "a risk of serious harm to their health or safety" or that of others, including young children with autism;
* Those for whom journeys cause "very considerable psychological distress";
* Those with considerable difficulty walking, which covers "both the physical act and experience of walking";
The change follows an eight-week consultation launched in January which had more than 6,000 responses.
The badge scheme was launched in 1970, and currently around 2.4 million disabled people in England have one.
It enables them to park free of charge in pay and display bays and for up to three hours on yellow lines.
They cost £10 from local authorities, and those in London are also exempt from the Congestion Charge.
Around three out of four blue badge holders say they would go out less often if they did not have one, the DfT had previously said.
Jane Harris, director of external affairs at the National Autistic Society, said the change would "make a massive difference to the lives of many of the 600,000 autistic people in England, and their families".
She said: "Just leaving the house is a challenge for many autistic people, involving detailed preparation - and sometimes overwhelming anxiety about plans going wrong.
"And some autistic people might not be aware of the dangers of the road or become overwhelmed by busy or loud environments.
"The possibility of not being able to find a parking space near where you're going can mean you can't contemplate leaving the house at all."
The Blue Badge scheme in Scotland was permanently extended in December to cover carers and relatives of people with conditions such as dementia, autism and Down's Syndrome.