Finance Minister Arun Jaitley said “no vehicle will have a red light” from 1 May, and “there will no exceptions”.
Under the new rule, only emergency vehicles, ambulances, fire engines and police cars can use flashing blue lights.
Critics say VIPs often use red beacons as a status symbol, leading to traffic chaos for commuters.
Status-conscious politicians and government officials are also accused of using the beacons to bypass the gridlocked city traffic on official business and show off their importance.
Mr Jaitley said the government was “removing the rule which allows state and central government to specify who can use the red lights”.
Correspondents say the government’s move comes as a blow to India’s fabled “VIP culture” that privileges politicians and officials above ordinary citizens