The project is expected to create more than 10,000 jobs and construction is slated to start in 2020.
The firm requires around 50 to 80 hectares of land and had chosen Kaohsiung Science Park as the location for its new plant, the ministry said.
According to the chip supplier, its 7 nm chips will go into production in 2018, while construction required for its 5 nm process will begin next year.
The firm said it would continue to grow the research team for 3 nm production, boosting its research and development team to more than 300 people.
The investment is needed to compete on even terms against its deep-pocketed American and South Korean rivals, as well as to make a foray into some of the emerging tech sectors that are expected to become multi-billion dollar industries in the future; namely, artificial intelligence, machine learning and self-driving vehicles, all of which require some serious processing power.
TSMC has already been working on 5nm chip technology. TSMC has now got over 300 of its engineers working on 3nm and 2nm chips. The company plans to start mass production of its 7nm chips in early 2018.
TSMC is roughly tracking to the industry roadmap from 2014.