The charismatic former leader from the ruling Bharatiya Janata Party (BJP), who turns 90 on Thursday and is in ill health, was premier first in 1996 and again from 1998 to 2004.
Known for his consensual approach, his nearly five decades of parliamentary experience earned him respect across the political spectrum, including from the rival Congress party.
Current Indian Prime Minister Narendra Modi, also of the BJP, said he was "delighted" by the decision to award Vajpayee the Bharat Ratna.
"A guide, inspiration & giant among giants. His contribution to India is invaluable," Modi tweeted.
Pakistan and India have fought three wars and came close to a fourth in 2002 before Vajpayee extended the hand of friendship to Islamabad.
The Bharat Ratna is also being conferred on the late Indian educationist Madan Mohan Malviya, who established India's renowned Banaras Hindu University and also took part in the country's independence movement.
Just 43 people have been honoured with the title since its inception, including scientist CV Raman and star cricketer Sachin Tendulkar.
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Vajpayee extended hand of friendship and Pakistan backstabbed him with Kargil. But still they blame India...
@BlackJack: During Kargil misadventure, both nuclear states came very close to full scale nuclear war but it was Mr. Vajpayee's statesmanship which saved 1.5 billion people from nuclear catastrophe. Mr. Vajpayee deserves lot of respect in Pakistan.
I really don't know why Pakistan is dragged into this picture. Vajpayee is being awarded the Bharat Ratna because he was an exemplary stalwart who had earned respect from his peers across the political spectrum, and for his services to the nation during Janata Party and BJP Governments. It has nothing to do with good or bad relations with Pakistan - Kargil was in process while he was signing the Lahore declaration, was that a time of good relations or bad?