The former soldier will also be charged with wounding with intent after Daniel's cousin Christopher Hegarty, then aged 17, was also shot and injured in the incident.
Last year, the Hegarty family won the right to seek the prosecution of the soldier after the High Court quashed a PPS decision not to bring criminal charges against him.
Director of the PPS Stephen Herron met with members of the Hegarty family to inform them of the decision at a private meeting in Derry on Monday.
Mr Herron said: "Following the ruling of the Divisional Court last year I conducted a review of this case.
"I have given careful consideration to all of the available evidence.
"This has included material obtained in the course of the initial investigation, by a later investigation carried out by the Historical Enquiries Team, material generated by inquest proceedings and a number of expert forensic reports, the most recent of which was provided after the court ruling in 2018.
"I have concluded that the evidence which can be presented at court is sufficient to provide a reasonable prospect of conviction and that the evidential test for prosecution is met.
"As with all cases, I have also carefully considered whether the public interest requires prosecution through the courts.
"Particular consideration was given to Soldier B's ill health, regarding which an updated medical report was obtained.
"In line with our Code for Prosecutors, I have concluded, given the seriousness of the charges, that the public interest test for prosecution is also met.
"I have therefore taken the decision to prosecute an individual identified as soldier B for the offence of murder in relation to the death of Daniel Hegarty and for the wounding of Christopher Hegarty.
"This decision has been reached following an objective and impartial application of the test for prosecution which was conducted in accordance with the Code for Prosecutors and with the benefit of advice from senior counsel."
A Ministry of Defence spokesperson said: "We note today’s decision taken by the Northern Ireland Public Prosecution Service, and we will offer full legal and pastoral support to the individual affected.”