Terry will resume the duty permanently, starting with England's Euro 2012 qualifier against Wales on March 26, taking over from Rio Ferdinand who is likely to miss that match with a calf injury.
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Capello said his decision had been influenced by the events of last month's friendly in Denmark when the captaincy passed from Frank Lampard to Gareth Barry and then Ashley Cole in the absence of Ferdinand and vice captain Steven Gerrard.
"After what happened, I decided that John Terry, after one year of punishment, will be the permanent captain," the Italian told reporters.
"He is a leader but sometimes the leader can make mistakes - not only him but I, you, all the people... I think one year's punishment is enough.
"He understood the mistake and he (has) learned from his mistakes... He will be a very important captain for us because when I choose him, I know he is a leader... He is the biggest personality in the dressing room."
Capello said he had not spoken face-to-face with Ferdinand about the decision but was later seen at Old Trafford watching Manchester United beat Bolton Wanderers 1-0 on Saturday where he may have had an opportunity to discuss the decision with him.
The captaincy issue has been a hot topic in the British media this week and Capello said he understood the importance while pointing out the debate over who should wear the armband did not get anywhere near as much attention in other countries.
"Not only in Italy but also in Spain (it is different)," he said. "With the international team, absolutely, always, it is 100 percent the person with the most caps is the captain."
