Council tenants who rake in thousands of pounds a year by subletting their homes face up to two years in prison, it was revealed today.
Courts would also be able to fine offenders up to £50,000, under detailed proposals unveiled by the Government.
Abuse of social housing is estimated to cost the taxpayer more than £5 billion a year.
However, it is not currently an offence to sublet a council house. Officials believe up to 160,000 tenants are renting properties to other people.
Housing Minister Grant Shapps said: "Tenancy cheats are taking advantage of a vital support system for some of the most vulnerable people in our society and getting away with a slap on the wrist while our waiting lists continue to grow.
"It's time for these swindlers to pay the price.
"It would cost us billions of pounds to replace the huge number of unlawfully occupied social homes across the country.
"Meanwhile tenancy cheats can earn thousands of pounds letting out their property, which was given to them in good faith and which could instead be offering a stable home to a family in need.
"The proposals I've announced today would not only deliver justice to these fraudsters, but will also act as a deterrent to those who think they can earn a fast buck from this precious resource.
"I want everyone to know that our country's social homes are going to those in genuine need, not providing a 'nice little earner' to someone who could afford to live elsewhere."
The plans, being put out for consultation, would see the creation of a new criminal offence of tenancy fraud, with a maximum sentence of two years' imprisonment and a fine of up to £50,000 if the case goes to crown court.
The money seized would be handed back to the social landlord in whose stock the fraud was committed, rather than going into government coffers.
Local authorities would also get stronger powers to investigate fraud, including easier access to data from banks and utility companies.