The law, passed more than 60 years after India won independence, has been hailed by children's rights campaigners and educationalists as a landmark in the country's history.
India's failure to fund universal education until now, and its focus on higher education, have been cited as factors in its low literacy rates. More than 35 per cent of Indians are illiterate, and more than 50 per cent of its female population cannot read.
Official figures record that 50 per cent of Indian children do not go to school, and that more than 50 per cent of those who do drop out before reaching class five at the age of 11 or 12.
Campaigners say children from poor families are often discouraged by parents who need them to work, while financial obstacles are put in the way of families who would like their children to be educated. Families are often deterred by the cost of school books and uniforms.
The Right to Free and Compulsory Education Bill will now guarantee 25 per cent of places in private schools are reserved for poor children, establish a three-year neighbourhood school-building programme, and end civil servants' discretion in deciding which children will be given places.
"Nobody can say no to admission to children. We are sitting on a great opportunity. If we lose it, I don't know what will happen to our country," said Kapil Sibal, the human resources and development minister.
"[Education] will be a fundamental right of the child. There is no way that we will not have the finances. We have to do it, we have wasted a lot of time," he told parliament.
The bill's passage was welcomed by campaigners who warned that the legislation that the government would have to remove other obstacles to universal education.
"It's a welcome step, but the government has to take strict measures to control child labour, which is the biggest impediment to child education," said Thomas Chandy, chief executive of Save the Children India.
"Passing a bill is one easy thing to do, what is important is to make parents, particularly in rural areas, aware of the benefits of education and to make them send their children to school. This change has to come at the community level and also to make people at the helm of affairs accountable."