The decision will see the government forced in next year's budget to lift the cap for around 3.5 million workers, but spares Prime Minister Matteo Renzi the pain of trying to squeeze reparation money out of the recession-hit coffers.
Making up for five years of freezes would have cost the government around €35 billion (over $39 billion), according to official estimates.
The cap was brought in by ex-premier Silvio Berlusconi's government for a three-year period, extended by successive governments, and would have run until 2017.
The freeze had been contested by trade unions in several Italian courts, which had asked the country's constitutional court to rule.
Government lawyers had insisted it was better to freeze salaries than fire people, pointing to the debt-laden country's struggle to curb its deficit.
The unions had slammed the measure as “unacceptable and subversive”.
The ruling comes into effect in the next few weeks. La Repubblica daily said it was difficult to quantify the cost to the state for the remainder of the year, but it estimated it would have to increase its outlay in 2016 by some €900 million.
It follows the overturning last month by the constitutional court of a key plank of the country's pension reforms, leaving the government facing a mammoth adjustment. Renzi has promised to pay out at least €2.0 billion.
Italy, which only last month emerged from the deepest recession since World War II, had pledged to lower its budget deficit from 3.0 percent to 2.6 percent of GDP in 2015 — promises Renzi will now be finding it harder to keep.