Thanks to the Heritage Lottery Fund grant the sails are to be replaced and the building renovated.
The mill has not had sails since they were destroyed more than 100 years ago in the gales of 1895.
Byron Hahn, chairman of Moulton Windmill Project, said: "When it is renovated Moulton Mill will again take its position as the tallest and biggest mill in the country and we hope to be entered in the Guinness Book of Records. It will be a national landmark.
"It's absolutely great that at long last we have managed to get sponsorship."
The mill will be transformed to allow it to produce organic flour. There will be a meeting hall, exhibition centre and tea rooms.
Plans also include a lift for full disabled access, which is thought to be a unique feature.
Sheila Stone, Heritage Lottery Fund manager for the East Midlands, said: "Moulton Windmill is a major landmark and has a fascinating history.
"We are delighted to provide this grant to restore the mill and help people to understand more about it, providing a great boost to tourism along the way."
After flour production ended at the mill electrically powered machinery was used to produce animal feed until its last miller John Biggadike retired in 1995.
The mill was then handed to Weston Hills firm Broadgate Homes, which passed it into the care of the charity Moulton Windmill Project under a 200-year lease.
During the last five years the charity, along with Friends of Moulton Mill and individual fundraisers, have worked to complete grant applications and raise a total of £900,000.
Restoration of the mill will allow it to join only about 50 workable or working mills in the country.
The mill, which has been open to the public three times a year since 1995, will be opened again on Saturday, September 13. and Sunday, September 14, as planned. After that weekend work will begin.
It is expected to take three to four years to complete and it is not yet known whether the mill will be able to open at all within that time.
The Lottery grant and plans for the mill were announced at a special lunch at John Harrox Sports Club, Moulton, on Sunday.
Up to three full-time jobs are expected to be created with the opening of the mill, including roles for a miller and exhibition centre staff.

Moulton Windmill Project is offering the 208 sail shutters for sponsorship.
It suggests £50 per sail and there will be a record of all sponsors in the renovated mill.
Mr Hahn said the idea will allow people to commemorate people, pets and special dates such as births, marriages and deaths.
Anyone interested in sponsoring a sail should telephone Mr Hahn on 01406 373368.
To contact the reporter who wrote this story e-mail Louise Brain