The Home Detention Curfew (HDC) scheme means inmates can be released with an electronic tag and under a curfew up to four-and-a-half months prior to their scheduled release date.
Ministers want to extend the maximum early release period under HDC in England and Wales by six weeks to six months, The Times said.
Figures published by the Home Office show there were 83,917 people in prison as of last Friday, while 2,718 were on the HDC scheme.
The paper reported the proposals, which need approval from MPs and are not linked to the outbreak of the coronavirus, will see up to 600 fewer inmates at any one time, citing estimates from the Ministry of Justice.
HDC was introduced in 1999 to provide a "managed transition" from prison to community for offenders serving short custodial terms.
Prisoners jailed for at least three months and less than four years can be considered for release on HDC.
Criminals in several offence categories are either barred or "presumed unsuitable", including sex offenders, terrorists and foreign national prisoners facing deportation.
Post-release, an individual on HDC is made to wear an electronic tag and must abide by a curfew until they have reached their automatic or conditional release date.
A Ministry of Justice spokesman said: "This Government has been very clear that serious offenders should stay in prison for longer and that public protection is our top priority.
"Any effective justice system must also rehabilitate whenever possible and Home Detention Curfew allows carefully assessed offenders, who committed less serious crimes, to begin their reintegration back into the community.
"They remain subject to strict conditions, including electronic tags, and can be returned to custody if they fail to comply with any of these."