The Overseas Operations Bill has been approved by MPs during a second reading.
The Government says the proposed legislation will ensure service personnel will be protected from "vexatious claims and endless investigations", with the aim of reducing uncertainty from historical allegations against serving personnel or veterans.
Ministers said it seeks to limit false and historical allegations arising from overseas operations by introducing a statutory presumption against prosecution, making it exceptional for personnel to be prosecuted five years or more after an incident.
When coming to a prosecution decision, an independent prosecutor must weigh up the adverse impact of overseas operations on service personnel and, where there has been a previous investigation and no compelling new evidence, the public interest in cases coming to a timely conclusion.
If their decision is to go forward to prosecution, they will have to seek the consent of the Attorney General to do so.
The bill was approved by 331 votes to 77 in Parliament on Wednesday and will undergo further scrutiny at a later date.
During heated exchanges in the Commons, the Defence Secretary Ben Wallace claimed "illegal wars" instigated by the Labour Party had contributed to the legal "mess" faced by British personnel.
Shadow Defence Secretary John Healey responded by saying the matter was "too important for party politics".
Watch: Ben Wallace criticises the Labour Party over 'illegal wars' during the Commons debate.
Mr Wallace rejected claims that the Overseas Operations Bill could decriminalise torture and murder.
"We’ve been told that this bill is controversial," he told the House of Commons.
"Some have gone as far as to have said it decriminalises torture or prevents veterans from receiving compensation.
"Both allegations are untrue. I have to question if those making those points have actually read the bill in full."
He continued: "It is our intention should new or compelling evidence be brought forward to prosecute for those offences.
"It is not decriminalising torture, it is not decriminalising murder in any way at all."
"We want in the future the ability, if necessary, to allow soldiers to focus on the danger and job in hand when in operations, not on whether they will have a lawsuit slapped on them when they get home," Mr Wallace added.
Mr Healey suggested the bill is more about protecting the Ministry of Defence (MOD) than protecting British troops.
He also said the bill denies troops who serve overseas the same employer liability rights as the UK civilians they defend.
Mr Healey told the Commons: "Over the last 15 years, there have been 25 cases brought by injured British troops against the MOD for every one case brought by alleged victims against our troops.
"So, you can see why some of the veterans I’ve talked to about this bill reckon it's more about protecting the MOD than it is about protecting troops."
Defence minister Johnny Mercer criticised opposition members for painting a "caricature" of the bill which he said was "totally, totally false".
"I haven’t heard such an amount of vacuous nonsense for a long time from the Opposition," he told the House of Commons.
"They bring in these terms around protecting our troops and talk about protecting our troops, invoking what I’m afraid is a litany of things that are not true."
Former Labour Party leader Jeremy Corbyn was among 18 Labour MPs to vote against the bill at second reading.
He wrote on Twitter: "The #OverseasOperationsBill violates essential rule of law principles, including with regards to the absolute prohibition of torture.
"It also fails to protect the safety, wellbeing and rights of our military personnel.
"For these reasons, I have voted against it."