The failure of the bill is a major setback for Prime Minister Rishi Sunak who has made putting a stop to irregular migration a key part of his agenda.
The bill wants to label Rwanda a safe country for deportees to sidestep a Supreme Court ruling which declared the east African country unsuitable.
On Monday, the House of Lords passed five amendments to the draft text, which if ratified, would make it harder for the House of Commons to declare Rwanda “safe” and would require the government to comply with domestic and international law.
There were 277 votes in favour of establishing a mechanism to monitor whether Rwanda is safe to 167 in opposition.
In early January, most British lawmakers approved the controversial bill before their colleagues in the upper chamber voted to delay it.
The bill compels judges to regard Rwanda as a safe country and gives ministers the power to disregard parts of the Human Rights Act.
For accepting to receive deportees, Kigali has so far pocketed $300 million from London.
After numerous court cases and international outcry, no deportation flights have taken off under the deal struck in April 2022.
Prime Minister Sunak has vowed to press ahead with the plan.