While the death sentence remains, courts would be given the option of imposing jail sentences of between 30 and 40 years and caning not less than 12 times, Deputy Law Minister Ramkarpal Singh said.
Previously, courts had no choice but to mandate hanging as punishment for a range of crimes including murder, drug trafficking, treason, kidnapping and acts of terrorism.
The reforms include abolishing the death penalty for some offences that don't cause death that fall under kidnapping and certain firearm crimes.
Natural life imprisonment, in which prisoners are kept behind bars till death, will also be replaced with jail terms of between 30 and 40 years.
Singh called the reforms a significant step forward for Malaysia's criminal justice system.
He said 1318 people were on death row, including 842 who had exhausted all avenues of appeals.
Most cases are linked to drug trafficking. Once the bill comes into effect, prisoners will have 90 days to file a review of their sentences but not their convictions.
Singh stressed that courts still had the power to uphold a death penalty after reviewing a prisoner's sentence.
The bill is expected to be approved by the upper house and the king and become law.
Malaysia has had a moratorium on hanging since 2018. The government also proposed last year to abolish mandatory death penalties, but the move was scuppered after parliament was dissolved for a general election.
Foreigners account for more than 500 of those on death row, according to the Anti-Death Penalty Asia Network.
"Essentially, we have now narrowed down our death penalty to only three main groups of offences: murder, drug trafficking and treason," Dobby Chew of ADPAN said.
"This is a good first step forward. It brings Malaysia closer in line with international standards for those countries that retain the death penalty."
