The new name is translated into "archipelago" in the Indonesian language.
"The move of the capital to Kalimantan is based on several considerations, regional benefits and welfare. With the vision of the birth of a new economic center of gravity in the middle of the archipelago," said Suharso Monoarfa, the country's Minister of National Development Planning, according to Indonesian Parliament TV.
President Joko Widodo first announced that the capital would be relocated in 2019, citing concerns about Jakarta's environmental and economic sustainability.
It is also one of the world's most overcrowded urban areas. It is home to more than 10 million people, with an estimated 30 million in the metropolitan area, according to the UN.
On Tuesday, the bill to relocate the capital was passed with approvals from eight factions and only one faction rejecting it, according to the chairman of Indonesia's House of Representatives Puan Maharani. Indonesia's parliament consists of nine groups of political parties known as factions.
Legislators have emphasized the importance of carefully considering the environmental impact of the new development. According to data from the State Planning and Development Agency, the total area for the new capital will be around 256,143 hectares (around 2,561 square kilometers) - almost everything converted from forest area.
Indonesia owns most of Borneo, the world's third largest island, with Malaysia and Brunei each owning parts of its northern region.
Sri Mulyani, Indonesia's finance minister, said at a news conference on Tuesday that there will be five stages of development in the new capital.
The first phase is expected to begin in 2022 and run through 2024, with development expected to last until 2045, Monoarfa said.
Earlier estimates have said the ambitious project is likely to cost around 466 trillion rupiah ($ 32 billion), CNN Indonesia reported.
CNN's Rob Picheta contributed reporting.