Council tenants in England who sub-let their homes will face up to two years in prison under government proposals.
The plans would see a new criminal offence of tenancy fraud, with a fine of up to £50,000 also possible.
Officials estimate that 160,000 tenants sub-let their homes to other people at cost of £5bn a year to the taxpayer.
Housing Minister Grant Shapps said some people were cheating the system by earning thousands of pounds letting out their council homes at market rents.
'Slap on wrist'
Sub-letting a council property is not currently a criminal offence.
Local councils would also receive more powers to investigate fraud, including better access to information from banks and utility companies.
Mr 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."
He added: "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."
Ministers are putting out the proposals for consultation.
The government has already signalled its intention to make tenants who earn at least £100,000 a year pay market rates.
The Welsh Assembly government is planning to publish "shortly" a consultation on ways to strengthen existing social housing legislation in Wales.
In Scotland, the administration said it has no intention of following the UK government's plans and was instead focused on delivering new affordable homes.
About 1.8 million families in England and Wales are currently on waiting lists for social housing.