The £500,000 was awarded to help Mermaids create a network of groups across the country, but in December the grant was paused amid a public and media backlash.
An article in the Sunday Times criticised the charity's stance on treatment for gender dysphoria, a condition where people are born into a body with the wrong gender.
The piece claimed that parents are being pressured to support life-changing medical procedures for their children and doctors are being bullied.
TV writer Graham Linehan has also voiced concerns around the grant and posted a thread on Mumsnet, that has since been deleted, urging people to write to fund if they have concerns about the organisation and the funding award.
A 40-page report published today by the National Lottery Community Fund, said the fund had received "over 800 representations expressing both concern and support for the organisation as well as broader reflections on the best ways to support young people with gender dysphoria".
After meeting with Mermaids to go over the concerns, as well as consulting with NHS leaders in the field, the fund upheld its decision to award the grant, to be paid over five years.
The fund said in a statement: "Following public interest regarding the proposed grant to Mermaids UK, The National Lottery Community Fund undertook a review of a number of concerns expressed in relation to the charity.
"This review did not find any grounds to withhold funding from Mermaids UK. The grant has therefore been approved by the England Funding Committee.
"As part of our grant management process, we will work closely with Mermaids UK to ensure they are supported in their development."
Mermaids thanked the fund for conducting the review in a "detailed, thorough, fair and appropriate manner".
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A statement from the charity said: "For Mermaids, the review was an opportunity both to affirm the value of increasing direct support with local groups, alongside training delivery and research development, and to demonstrate to the fund that the charity was well positioned to produce and manage these initiatives.
"Mermaids will now be able do more to improve outcomes and experiences for transgender and gender-diverse children and young people.
"During the review, Mermaids was overwhelmed by the support received from our current funders, organisations and individuals. The messages of support and solidarity have been incredible, and have been appreciated by the families that we help and all of our hard-working volunteers, staff and trustees."
It added: "The grant means there will now be local support when currently there is none. This cannot be a bad thing. The UK will now be a better place for transgender and gender-variant children and their families."
Among those to support Mermaids is Simon Blake, deputy chair of the charity Stonewall and chief executive of mental health organisation Mental Health First Aid England. He described the Sunday Times article as "a cheap pop".
