It is hoped that her involvement will help create greater awareness of sanitation issues in India.
Rural Development Minister Jairam Ramesh told PTI that Balan's involvement would make a positive difference to the campaign.
"She has agreed to give her time for the campaign for two years. She will be fully involved in the Nirmal Bharat Abhiyan [the restructured version of the Total Sanitation Campaign]," he said.
"Vidya's involvement in the campaign will help make it a national obsession. This is a clean picture [for Balan]."
Speaking about the campaign, the National Award-winning actress said: "For an actor, what can be a better thing than doing a dirty picture on screen and off screen a clean picture. I think this role will work a lot because we are working on a national movement.
"I think it is a matter [of] great honour for me, becoming the brand ambassador of sanitation campaign. It needs to become a national obsession. I am ready to [do it] in my capacity. I am convinced."
Balan, who will appear in ad campaigns to propagate construction and use of toilets, is the first brand ambassador of the Ministry.
Despite being one of the fastest-growing emerging economies, access to adequate sanitation remains low in India, compared to many other countries with similar or lower GDP.