The B.C. government will build a jail along Highway 97 between Penticton and Oliver.
The 360-cell jail will be built in the Senkulmen Enterprise Park, which is owned by the Osoyoos Indian Band.
The $200-million project is the first partnership of its kind between BC Correction and a First Nation.
The jail is being built to increase capacity in the system, said Minister of Public Safety Shirley Bond.
The government looked at sites proposed by two communities and two bands before deciding to build the jail on Osoyoos Indian Band land.
"Our band owns the most businesses per capita of any First Nation in Canada, which makes us a major economic driver in our region. This project will only build on our history of success," said Osoyoos Indian Band Chief Clarence Louie.
Premier Christy Clark said the provincial government will be completing a business plan with the Osoyoos band as the next step of the project.
In early May 2011, five local governments and First Nations - the Village of Lumby, District of Summerland, City of Penticton, Penticton Indian Band and Osoyoos Indian Band - proposed a total of 13 sites.
BC Corrections staff visited the proposed sites and met with local government and First Nations staff.
The City of Penticton rescinded its two site proposals in June 2011.