New guidelines will spell out factors that must be considered before mental health crises are disclosed in background checks.
Police will be required to examine issues such as a person's behaviour during the episode and how long ago it happened when assessing whether detention under the Mental Health Act should be included on criminal record certificates.
The new instructions relate to disclosure and barring checks, which are required for certain jobs or voluntary roles, including those that involve working with children.
Campaigners said that a lack of clarity in the current system meant people held under the Act could be "unnecessarily excluded" from posts.
A review conducted last year found that in some cases irrelevant or partial information about detention under the Act is being released.
The Home Office said the new guidance, which will be issued on Monday, states that:
:: Detention under the Mental Health Act, which does not constitute a criminal investigation, is unlikely in itself to be sufficient to justify disclosure.
:: The behaviour of the person during the incident must be a "key consideration" for officers when considering checks. This could include assessing whether the person presented a risk of harm to others or whether they were involved in multiple incidents.
:: The date of the mental ill health episode is an "important" factor. In cases where it took place a long time ago, officers should consider giving the applicant an opportunity to make representations about their current state of health.
:: If information is disclosed, the certificate should provide an explanation so the employer or voluntary organisation clearly understands the relevance of the information to the application.
Paul Farmer, chief executive of mental health charity Mind, welcomed the move.
He said: "The nature of the current process means that people who are perfectly able to do a job may be unnecessarily excluded because of a lack of clarity about what should and shouldn't be disclosed.
"There is no reason why having a mental health problem or having been previously detained under the Mental Health Act should necessarily be a red flag when it comes to DBS checks.
"This guidance is an important next step in providing greater clarity, but there is still room to go further."
Home Office minister Karen Bradley said the guidelines aim to make the system fairer without lessening protection.
She said: "It is important that checks provide employers with the information they need to protect children and vulnerable groups.
"At the same time, police disclosure of information relating to mental ill health can have a significant impact on the lives of those concerned, including their employment opportunities.
"We want to support the police in their decision making by providing additional statutory guidance on mental health. This will help ensure that chief police officers take the right factors into account when considering each case and that any information disclosed is relevant and proportionate."
Community and social care minister Alistair Burt said the changes will help prevent people being "stigmatised" as they attempt to find work or volunteering opportunities.
He added: "Having a mental illness is not a crime - your medical history wouldn't be flagged to your employer, so it's right that we make the same true for someone who's had a mental health crisis."