The move had been one of the flagship policies of Acting Prime Minister Pedro Sanchez's Socialist Party (PSOE) government but was met with opposition from the Franco family, reports Efe news.
All six judges at the country's top court gave the green light to remove the late dictator's corpse and rebury it at the El Pardo-Mingorrubio cemetery, where his wife, Carmen Polo, was laid to rest.
Relatives of the late right-wing military leader were opposed to his exhumation but said if he was moved he should be reburied at the Almudena Cathedral, which is located in the heart of Madrid next to the Royal Palace.
"Franco will leave the Valley of the Fallen," PSOE tweeted. "It ends an unthinkable anomaly in a democracy like ours."
The ruling comes just as Spain's Houses of Parliament were officially dissolved ahead of general elections slated for November 10.
The Valley of the Fallen is a colossal monument located in the mountainous countryside outside Madrid that was built by Republican political prisoners after the Spanish Civil War (1936-39), which Franco's nationalist forces won.
Last year, Sanchez's government amended the Historical Memory Law, which gives rights to the victims of the Civil War and Franco's dictatorship, to state that only those who died in the conflict could be buried at the Valley of the Fallen.
Franco died in November 1975 after a series of illnesses, having ruled Spain with an iron fist for four decades.
The 492-foot granite cross towering over the complex can be seen from several miles away, which many Republican survivors, their relatives and democratically-minded citizens consider offensive.
It is considered the only state-endorsed mass pilgrimage site remaining in Europe after the end of World War II.
( With inputs from IANS )