The 30-year-old left-hander underwent chemotherapy in the United States in March and April to treat a rare germ-cell tumour between his lungs which was diagnosed late last year.
Yuvraj, who was man of the tournament in India's World Cup triumph last year, has not played competitive cricket since two home Tests against the West Indies last November.
But the selectors recalled him as soon as he was declared fit by doctors at the National Cricket Academy in Bangalore where he had begun light training in July.
"It is hard to believe that I will be playing for India again," Yuvraj said ahead of the first Twenty20 game against the Black Caps in the southern coastal town of Visakhapatnam.
"A few months back I had trouble climbing four steps, now I can't wait to take the field. It is like starting a new life," said the all-rounder.
Veteran spinner Harbhajan Singh, also making a comeback after being out of favour with the selectors for a year, said he was delighted to see close friend Yuvraj back in action.
"Now this is what we call a comeback," said Harbhajan. "There can't be a bigger inspiration in cricket than Yuvi. It is a privilege to be back in the dressing room with him."
The match on Saturday and the second game in Chennai on Tuesday will serve as a tune-up for the World Twenty20 that starts in Sri Lanka on September 18.
The Black Caps are hoping to end their Indian tour on a high by winning the Twenty20 games after being whitewashed 2-0 in the recent Test series.
All-rounder Jacob Oram, who did not play in the Tests, said the two games were timely ahead of the tournament in Sri Lanka.
"We are here to win but whatever happens we have to make sure we learn from the series because it's great preparation," Oram said.
"You are not going to get a tougher competition than playing India in India. Fifty-over champs but perennial T20 favourites as well."
New Zealand will be boosted by the return of influential all-rounder and former captain Daniel Vettori, who missed the Tests due to a groin injury.
Tickets for the first game at the 27,000-capacity Andhra Cricket Association stadium have been sold out despite forecasts of bad weather on Saturday.
India (from): Mahendra Singh Dhoni (capt), Gautam Gambhir, Virender Sehwag, Suresh Raina, Virat Kohli, Yuvraj Singh, Irfan Pathan, Ravichandran Ashwin, Zaheer Khan, Lakshmipathy Balaji, Ashok Dinda, Rohit Sharma, Piyush Chawla, Harbhajan Singh, Manoj Tiwary.
New Zealand (from): Ross Taylor (capt), Martin Guptill, Rob Nicol, Brendon McCullum, Kane Williamson, BJ Watling, James Franklin, Jacob Oram, Nathan McCullum, Daniel Vettori, Kyle Mills, Doug Bracewell, Tim Southee, Ronnie Hira, Adam Milne.