The 77-year-old actor will receive the Dadasaheb Phalke Award at the National Film Awards later this year.
Shashi's son Kunal told NDTV that his father's first reaction on hearing the news was: "Me? I got it?" before chuckling.
"I think he must be quite chuffed because his father won it as well," said Kunal.
Shashi's nephew, actor Rishi Kapoor also reacted to the news saying: "I don't think it's a delayed honour. Shashi Kapoor was a visionary who did films that were ahead of their time."
Rishi also congratulated his uncle on Twitter.
Yessssssss! Shashi Kapoor to get the prestigious Dada Saheb Phalke award for contribution to Indian Cinema. Well deserved uncle. God Bless!
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— rishi kapoor (@chintskap) March 23, 2015
Shashi Kapoor is the star of several Bollywood films, as well as English movies Heat and Dust and The Householder.
He starred in ground-breaking films such as Deewar and commercial movies including Namak Halaal.
He also turned director with the 1991 film Ajooba and produced the likes of 36 Chowringhee Lane and Utsav.
Third Padma Bhushan and third Phalke award in the family.Prithviraj Kapoor and Raj Kapoor being the other recipients pic.twitter.com/YufXptMWM3
— rishi kapoor (@chintskap) March 23, 2015
Shashi earlier won the National Award three times and received the Padma Bhushan in 2011.
He is the third member of the family to receive the Dadasaheb Phalke Award, after his father Prithviraj and elder brother Raj.
The Dadasaheb Phalke Award consists of the Swarn Kamal or Golden Lotus, a cash prize of Rs 10 lakhs and a shawl. The previous recipient was lyricist-director Gulzar.
