Plans to cut the legal aid bill by awarding contracts to the lowest bidder have been dropped but other cuts are expected to go ahead.
In a statement to the Commons Justice Secretary Mr Grayling said prisoners and households with more than £3,000 per month of disposable income would no longer be able to access legal aid.
And immigrants who had been in the country less than a year would be unable to access aid in civil cases, he said.
The government plans to put a cap on contracts for duty solicitor work at police stations and to reduce legal aid fees by 17.5% across the board.
It also plans to set up a working party to look at how thousands of short hearings can be avoided, or dealt with by email or video link.
The final proposals on legal aid reform are now subject to a six-week consultation.
Mr Grayling said: “We will introduce a new residency test that will prevent most people who have only just arrived in the UK from accessing civil legal aid until a year after they had arrived.
“We will limit criminal legal aid for prisoners so that it is not available unnecessarily. There will be no more legal aid available because you don’t like your prison.
“We will set out new rules that will mean the wealthiest Crown Court defendants – those in households with more than £3,000 in disposable income left after tax, housing costs and other essential outgoings – will have to fund their own legal costs.”
He said that when the government set out its plans in April “I was clear that they were for consultation. I have kept that promise”.
He said that the agreement is “a sensible proposal which is tough but realistic”.