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This paper proposes a capabilities approach-based interpretation of the least restrictive environment (LRE) mandate in the Individuals with Disabilities Education Act (IDEA, 2004) to secure equity-based inclusive education for children with disabilities. The capabilities approach’s focus on human dignity and human diversity makes it an ideal tool for re-envisioning the LRE requirements that ensure children with disabilities are entitled to the effective freedoms and compensatory resources. The re-envisioned LRE mandate results from adopting (a) a social-relational model of disability that emphasizes the relational mechanism of a disability between internal and external arrangements, (b) a holistic view that balances intrinsic and extrinsic goods of education, and (c) a justice claim for additional educational provisions in inclusive education for children with disabilities.