Health Minister Bent Hoie promised to put an end to a practice dating back to the 1970s which includes mandatory irreversible sterilisation and psychiatric evaluations before the state will recognise that a person has changed gender.
"The situation today is in my view intolerable and has gone on for far too long," the Conservative Party minister said, adding that the new proposal would be ready soon.
"The government's aim is to have a tolerant and inclusive society and that must also apply to people with different sexual identities."
Requiring sterilisation was "a violation of human rights", said Kari Paulrud, who headed the expert group commissioned by Norway's health ministry.
The group also recommended that Norway should go further than neighbouring Denmark -- which stopped sterilisations last year -- and not impose a six-month reflection period before registering a request for a legal gender change.
Patricia Kaatee from Amnesty International told AFP that the current practice was "medieval" and "based upon a very, very dangerous view that transgender people should not be able to have children."
John Jeanette Solstad Remo is a Norwegian transgender activist who was born a male, is a former submarine commander and now lives as a woman.
He said he knew from a very young age that he was not in the right body but that he never accepted the state's requirements to recognise he had a different gender.
"If you start taking hormones, it changes the body, and if you get castrated, you lose your sexuality... and then there is the issue of psychiatric evaluation: I don't want to be labelled 'mentally ill', because I'm not," he said.
Kaatee of Amnesty added that the new law would "send a signal to society about accepting minorities."
In a 2014 report, Amnesty estimated that 1.5 million transgender people were subjected to discrimination and degrading treatment in the European Union.
Most European countries still require sterilisation before recognising a legal gender change but the practice was dropped in the Netherlands last year and in Sweden in 2013.