The five other members of the committee include advertising guru Piyush Pandey and director Rakeysh Omprakash Mehra.
They've been given two months to complete their recommendations.
"I am personally not in favour of cutting up movies with a pair of scissors," said Mr Benegal, who has directed renowned films like Ankur and Junoon.
The censor board should only be there for deciding the type of audience suited for each film, Mr Benegal said, adding that he agreed to head the panel after being contacted by the Minister earlier this week.
The 23-member censor board is currently headed by film-maker Pahlaj Nihalani, whose decisions have often triggered pushback from other members.
Several filmmakers have complained of arbitrary objections and unnecessary cuts sought by the Board. Edits to the new James Bond film SPECTRE provoked ridicule online. (Also Read: Bejoy Nambiar Says Ridiculous Things Are Happening in the Censor Board)
"I do believe that time has come to have a look at the role of the Certification Board, as I prefer to call it. The Certification Board needs to be controversy-free," Information and Broadcasting Minister Arun Jaitley said earlier this week.
In March, top Bollywood personalities including actor Aamir Khan and directors Karan Johar and Vishal Bhawradwaj met with Minister of State for Information and Broadcasting Rajyavardhan Singh Rathore to ask for Mr Nihalani's removal.
He was appointed chief of the Censor Board in January, replacing Leela Samson, who quit along with 13 members, alleging that the government had over-ruled their decision to ban a film starring self-styled spiritual leader Gurmeet Ram Rahim Singh.
Last month, Mr Nihalani was criticized roundly for a sycophantic video praising Prime Minister Narendra Modi that was screened in theatres.