The plan is part of a fresh environmental drive under the administration of Luxembourg Prime Minister Xavier Bettel after his liberal-led coalition secured a narrow victory in an election in October.
Luxembourg's transport ministry said it cost €491 million a year to run public transport, with ticket sales and subscriptions bringing in €40 million.
And for older Luxembourgers, commuters get two hours of travel for just €2 ($2.27).
Luxembourg has previously shown it has a forward-looking attitude towards transport - over the summer, the government introduced free transport for young people under the age of 20.
Bettel's Democratic Party is ruling in coalition with the left-wing Socialist Workers' Party and the Greens. The move will also save on the collection and processing of fares and the policing of ticket purchases.
The proposal aims to reduce traffic congestion, as despite being a country of just 999 square miles, Luxembourg City suffers from some of the worst traffic congestion in the world.
Sandwiched between France, Belgium and Germany, from which nearly 200,000 people enter it daily to work, the Guardian reports.
A study suggested drivers in the capital spent an average of 33 hours in traffic jams in 2016. The new government also plans to introduce two new public holidays.
There is already free transport for under 20s while secondary school students can use free shuttles between schools and their homes.
The national public transport system now costs around €1 billion ($1.13 billion) each year to operate, but only recoups around €30 million ($34 million) in fares, The Independent explained.
The government, however, has yet to divulge their plans for the first- and second-class compartments on trains.
Bettel's idea therefore means fare on bus rides, trains and trams will completely be scraped off if he lives up to his vision. The result gave the coalition 31 seats in the 60-seat chamber.