The upgrades, expected to be over by 2024, are expected to enhance passenger experience and integrate the station into local road networks effectively.
Besides, they will help create around local 10,000 jobs and support economic growth in the area.
This overhaul will include the development of a brand new track, platform, and fully accessible entrance on the west side of the station.
The funding will also be used to revamp the existing road bridge on Botley Road and build a four-metre-wide cycling and walking path. It will help standard height double-decker buses to pass underneath the bridge.
Additionally, the financing will enable the creation of three new high-speed crossovers to facilitate trains to turn around in the station.
UK Rail Minister Wendy Morton said: “This £161m will truly transform the region, increasing the number of services for passengers, boosting economic growth by connecting people to new opportunities and increasing freight services between the South and Midlands.”
The capital will help Network Rail significantly upgrade Oxford station, as well as the railway in Oxfordshire and the nearby road network.