With a population of 40 million, the proposed state comprises 10 of Andhra Pradesh's 23 districts including Hyderabad, India's sixth biggest city.
The state has seen protests for and against the proposal in recent years.
Backers of the new state say the area has been neglected by the government.
"It wasn't an easy decision but now everyone has been heard and a decision has been taken," senior Congress leader Digvijaya Singh told Indian media.
Opponents of the move are unhappy that Hyderabad, home to many major information technology and pharmaceutical companies, could become Telangana's new capital. Full story...