Big-hitting opener Hales, who is ranked as the world's number one batsman in international Twenty20 cricket, admitted he was considering becoming a freelance Twenty20 player.
Nottinghamshire this year refused to allow their players to participate in the IPL, but have relented in Hales' case.
Providing he is offered contracts worth at least 400,000 US dollars (£250,000) each year, Nottinghamshire say Hales will be allowed to take leave from Trent Bridge in the spring during the next three seasons.
His potential earnings from the IPL stand to dwarf his county contract, and Nottinghamshire said that Samit Patel will also be released for the competition if he can secure a big-money contract.
Director of cricket Mick Newell said: "It's hard for us to deny an individual the opportunity to earn life-changing amounts of money but the team also has to be considered, so it made sense to allow him to enter the auction to see if there is sufficient interest in his services to secure a high-value contract."
Hales is set for a stint with the Adelaide Strikers in the upcoming Big Bash, and he could have gone his own way by embarking on a roaming T20 career had talks with Nottinghamshire collapsed.
Hales said: "I'm pleased to have come to an agreement with Notts because I want to spend my entire career here and I hope that will happen now that I've been given the opportunity to enter the auction.
"I'm not aware of specific interest from any given IPL franchise but I'm focused on performing well in the Big Bash because there are a lot of eyes on that tournament.
"I'm hoping to be involved in the Twenty20 matches between England and Australia which I hope can give me a platform to demonstrate my skills and stir interest from IPL teams."
He added: "It did cross my mind to go freelance and focus on Twenty20 full-time but I've had time to think and I'm still driven to do well in four-day cricket and to break into England's one-day set-up."