Ms Sitharaman said e-cigarettes were becoming an increasing health risk as they were being used as a "style statement", and not a tobacco cessation product.
Advocates for e-cigarettes say vaping, which usually involves inhaling a vapour formed from heating up a liquid containing nicotine, is far less harmful than smoking tobacco.
Briefing media in New Delhi, Finance Minister Nirmala Sitharaman said the Cabinet gave its nod to the Promulgation of the Prohibition of Electronic Cigarettes Ordinance, 2019. It is believed there are more than 400 brands, none of which is manufactured yet in India. If it is a repeat offence, the punishment can go up to three years imprisonment and a fine of Rs 5 lakh.
The draft ordinance was earlier sent to the Group of Minister's (GOM) to examine its various aspects.
The sale of e-cigarettes containing nicotine have been previously banned in several European countries, including Sweden and Norway, as well as in Hong Kong, Japan and Brazil.
"If e-cigarettes are allowed in India, it will have a devastating effect on the tobacco farmers in India".
Public health experts said e-cigarettes pose significant health risks similar to conventional cigarettes.
They have been pushed by producers, and also by some governments including in Britain, as a safer alternative to traditional smoking - and as a way to kick the habit.
In May, the health ministry issued a circular urging other departments to hold off on publishing any studies or reports on the e-cigarette market.
Earlier today, the Union Cabinet gave approval to ban e-cigarettes.
"Productivity-linked bonus amounting to 78 days' work wages for over 11.5 lakh non-gazetted Railway employees (excluding RPF/RPSF personnel) approved", the government said. More than 900,000 people die from tobacco-related illnesses in India each year, from an adult smoker population of over 100 million.
Shares in ITC, India's top cigarette maker, ended up almost one per cent, while its rival Godfrey Phillips surged 5.2 per cent. E-cigarettes form just a tiny part of their product range.