German architects GMP's design won the international tender and work will begin at the end of the season.
A new exterior will be built that includes a retractable roof and is due to be completed by 2017.
"We want to make the Santiago Bernabeu the best stadium in the world," said Real Madrid President Florentino Perez.
"Our commitment is to continue increasing the heritage of our club, thus gain in economic strength, so we can continue to lead in an environment of increasing competition.
"We believe in a project that will enhance our image, brand and city that we also feel proud of."
Reports in the Spanish media suggest half the financing for the project would come from selling naming rights and half from a bond issue among Real members.
The Bernabeu currently has a capacity of 85,454 but Real are yet to confirm whether this will change after the refurbishments.
Real Madrid have unveiled a £330m redesign plan they hope will turn their Santiago Bernabeu ground into the best stadium in the world.