When making the decision, the Krems Regional Court held that Fritzl no longer posed any danger and could therefore be kept in a standard jail.
Fritzl, who changed his name to Mayrhoff while in prison, was jailed in 2009 for several crimes including the unlawful imprisonment and rape of his daughter Elizabeth, who bore him seven children in a specially built soundproof basement.
One of the children, a boy, died shortly after birth in 1996, upon which Fritzl burnt his body.
Court spokesman Ferdinand Schuster told Austrian media on Wednesday that the decision was subject to an appeal to the Higher Regional Court (OLG) in Vienna.
Fritzl’s release into the mainstream prison system was decided upon by a three-judge panel under a probation period of ten years.
The panel made its decision based on a mental health assessment produced in March.
Fritzl stood trial in 2008 for the crimes, having been deemed sane and therefore faced mainstream charges.
Fritzl is eligible for release as early as 2023 after receiving a life sentence.
Austrian media pointed out on Wednesday that a 2023 release would see him serve nine years less than his daughter Elizabeth spent in Josef’s basement dungeon.