The new 5.47km part-street circuit will be around the IFEMA exhibition centre with easy access by rail and metro from the city and nearby Barajas airport, a positive for the sport's carbon footprint.
Organisers expect 90% of fans will be able to reach the venue by public transport.
"IFEMA... shares our vision and ambition to make the Spanish Grand Prix in Madrid one of the most accessible and sustainable F1 events on the calendar," F1 chief executive Stefano Domenicali said at a lavish presentation on Tuesday.
A press release said IFEMA exhibition halls used 100% certified renewable energy and any temporary structure built for the race would be built with recyclable materials.
Most of the latest additions to Formula One's calendar, a record 24 races for 2024, have been urban with the Las Vegas Strip, Jeddah's Corniche, Miami's Hard Rock Stadium and Singapore's Marina Bay standing out.
Rural favourites like Silverstone and Spa-Francorchamps, hugely popular with fans but heavily reliant on road access, have long ceased to be the business model.
Taking races to population centres, with concerts and entertainment thrown in, is the name of the game even if the tracks themselves are not necessarily conducive to great racing.
The likes of Germany's Nuerburgring and Hockenheim, France's Magny-Cours and Le Castellet and Turkey's Istanbul Park have disappeared from the calendar for financial reasons but also because public transport was almost non-existent and hotels scarce.
Barcelona's Circuit de Catalunya, current host of the Spanish Grand Prix, is some 32km from the eastern port city with a roughly 45-minute walk from the nearest station.
"Modern Formula One cars racing on a new circuit in the Spanish capital city of Madrid is an enticing prospect," said Mohammed Ben Sulayem, president of the governing FIA.
"As we build towards the introduction of the FIA 2026 Formula One regulations, which have been framed with Net Zero carbon by 2030 in mind, it is pleasing to see that the local organisers have placed a sharp focus on environmental sustainability in their plans for the event."
Formula One cars will use 100% sustainable fuel in 2026 when new engines are introduced but the logistics of getting to races - for teams and fans - provide the bulk of emissions.
Ironically, Formula One's city focus comes as all-electric Formula E - which has been net zero since the start in 2014 and has exclusive rights until 2039 to be the FIA's only fully-electric world championship - has expanded to permanent circuits.
That series switched its Italian round from a street circuit in Rome, which the cars have now outgrown, to Misano on the Adriatic coast.
The permanent Portland International Raceway, used by IndyCar, is also home to the U.S. round after New York ceased to be an option.
"We still want to keep our DNA of street racing and I think electric cars are for streets a great solution... but we are going faster and faster," series founder Alejandro Agag, a Spaniard, told Reuters.
"To show the performance of these cars, which is one of the objectives of Formula E, we are going to have to open up to some races in circuits.
"I think Formula One and Formula E are kind of heading to the same place from opposite sides, in a way."
