The changes will move those earning less than £50,000 a year onto a 10-year path to settlement status, unless they are exempt.
Mahmood also told MPs the government would provide a five-year path to settlement for care workers who “answered our call when we needed them” following the Covid-19 pandemic.
Mahmood said: “Those who earn £25,000 a year working in the social care sector, which was the condition of their visa, will therefore be able to settle on their existing five-year path.”
She added those care workers who did not meet the conditions of their visa could apply for another five-year visa and seek settlement after that.
MPs were also told:
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higher earners on salaries of more than £50,000 and those who have contributed in healthcare and education, such as doctors and teachers, will be able to qualify for settlement after five years
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the highest rate taxpayers earning more than £125,000 will be able to apply after three years
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refugees who arrived in the UK after crossing the Channel by small boat or another illegal route will have to wait 20 years if they work or study, and 30 years if they do not.
Mahmood said: “Our changes ensure those who are net contributors are encouraged to come to this country and stay here.”
She added: “As a result, the Department for Work and Pensions estimates that our reforms will reduce the benefits bill by billions of pounds.”
The original version of the plans announced by Mahmood last year would have delayed 799,000 people from gaining permanent residency.
Under the updated plans announced on Monday, that number would drop to 517,000.
One of those affected was Ashfak Juned, a Bangladeshi chef working in Birmingham, who told the BBC he was “crying” when he heard his wait for settled status would now last until 2033.
The home secretary also confirmed a number of groups would see their settlement path remain as it is today – including Hong Kong British nationals overseas, armed forces members, people with a British connection and those on legacy routes including the Windrush scheme.