Overseas personnel who have served in the UK military for at least six years will now be able to apply to stay in Britain without paying a visa application fee.
The £2,389 charge will also be scrapped for personnel who have been discharged for medical reasons relating to their service.
The waiver, agreed by Defence Secretary Ben Wallace and Home Secretary Priti Patel, will also apply to eligible veterans.
The new policy is due to come into effect in the spring and could help some of the 9,000 non-UK citizens currently serving in the Armed Forces if they want to apply for indefinite leave to remain in the UK after their service ends.
The policy changes do not relate to fees in an application for British citizenship, however.
Mr Wallace said: "It is only right that we have taken this important step to express our sincere gratitude to the brave men and women from outside of the UK who have made such a valuable contribution to the defence of this country."
Ms Patel said: "There are thousands of brave men and women across the Commonwealth who have served our country with distinction in the military over the years.
"Waiving the visa fee for those Commonwealth veterans and Gurkhas with six years' service who want to settle here is a suitable way of acknowledging their personal contribution and service to our nation."
The visa fee waiver will not, however, cover the families of overseas personnel.
Mr Wallace added: "It would be fundamentally unfair to pay for the families of Commonwealth soldiers but not the families of British soldiers… If you are a young Guardsman from Preston and you marry a girl from Singapore, it has never been the case that the Armed Forces pay for the new wife to come and settle."
The new policy has been welcomed, but critics think it still doesn't go far enough.
Liberal Democrat defence spokesman Jamie Stone says it will still leave many service personnel facing "excessive fees".
He said: "Limiting the waiver only to those who have served six years or more will leave many veterans still facing thousands of pounds in fees. I urge ministers to go further, and waive them for all those with the right to settle in the UK."
The Royal British Legion's (RBL) Director General, Charles Byrne, said: "Whilst we welcome the news that these fees will be waived for some Commonwealth Service personnel, this proposal still leaves many Armed Forces families facing severe hardship.
"We strongly urge the Government to go further and scrap these unfair charges for everyone who has served for at least four years, and their immediate family members.
"The RBL believes this latest proposal is contradictory to the pledges made by the Government in the Armed Forces Covenant and that as a country we can, and must, do better."
He added: "The sacrifices and commitment of those who come from the Commonwealth to serve our nation, and their families should not be forgotten."
The new policy follows a public consultation which received 6,398 responses.
Of the respondents, 81.56% supported the introduction of a fee waiver, while 64.86% agreed costs should be scrapped for those who had completed at least 12 years at the time of their discharge.
The fee waiver should be applied to personnel who had served at least four years, 33.42% of respondents believed.
And 73.49% of respondents to the consultation agreed the waiver should also apply to non-UK service personnel who have been medically discharged for reasons relating to their service, irrespective of time served.