He said the Scotland Bill, which is currently going through Westminster, would be a “game-changer” that would usher in a “new era of devolution”.
The minister said: “We are on the threshold of a new era in devolution and the Scotland Bill will be a game-changer.
“Scottish Government ministers will be able to design a significant part of Scotland’s welfare system and control income tax to pay for it.
“If they want to top up existing benefits, they will be able to. If they want to introduce payments to those in short-term need or design new benefits in those welfare areas being devolved, that will also be an option available to them.
Mr Mundell went on: “Powers in the Scotland Bill ensure the Scottish Parliament will have the means to pay for any changes, but it will have to justify them to the public, as under the new arrangements, income tax raised in Scotland will stay in Scotland and be spent in Scotland.”
However, the Scottish Government has insisted it will not recommend that MSPs approve the legislation if ministers believe the funding arrangements linked to the bill are unfair.
And Labour’s shadow Scottish secretary, Edinburgh South MP Ian Murray, said the bill must hand enough powers to Holyrood to allow it to negate the impact of cuts to welfare made by the Conservative government at Westminster.
He said: “I want the Scottish Government to have the power to create new benefits, to protect the vulnerable from Tory cuts and to raise all the money it needs for public services.”