The test, due to be unveiled today, is expected to get 20,000 people a year off sickness benefits and into work.
The Government says the new medical test, to be introduced in October next year alongside the new Employment and Support Allowance, will assess what an individual can do - rather than cannot do.
Everyone applying for the new allowance will have to take the test, and it is estimated half of those will not pass.
But Mr Hain said: "It is not about punishing people. I think those from the disability lobby are wrong to think that we are doing this as a form of punishment, this is not about that.
"This is about giving people opportunities because you are better off in work, the evidence shows that."
The new test will replace the current Personal Capability Assessment, which is weighted more towards a person's physical disability and bases itself around assessing people's incapability for work.
Under the new Work Capability Assessment, people will no longer score points simply because they are unable to walk more than 400 metres, for example.
Instead the new test will look at things like a person's ability to use a computer keyboard or a mouse, because this type of task is likely to be needed in the workplace.
Mr Hain said: "We know that many people want to work - work is good for you and your long-term well-being and we don't think it's right that in the past people were effectively written off.
"We want to work with people to get them back into jobs and help them stay there.
"Currently, there are many people sitting at home in the belief that they are unemployable, with no life choices or long-term prospects because they do not think their illness or medical conditions can be catered for in the workplace.
"But this is just not the case. Many people with such conditions are perfectly able to take up successful careers, if the right support is in place.
"That is why I have introduced the new assessment. It will not only accurately identify a person's physical and mental ability, it will offer advice on the type of help and support a person may need so that they can find sustainable work.
"But those who still qualify for Employment and Support Allowance following the new assessment will benefit from more help and more support than ever before."
There are currently 2.64 million working age people claiming incapacity benefits, which cost the country nearly 12.5 billion in 2006/07.
And it was reported today that obese people are costing the taxpayer 4.4 million a year in incapacity benefits, with 2000 classed as too fat to work.
The figures were released in response to a Freedom of Information request for a breakdown of the conditions cited by those claiming incapacity benefits.
But Mr Hain said it was "nonsense" to suggest that someone would be able to claim incapacity benefit simply because they were overweight.