Families have lost a High Court challenge against the Government's two-child rule for payment of tax credits and universal credit.
A judge in London ruled on Friday that the policy was "compatible" with human rights laws.
But campaigners welcomed Mr Justice Ouseley's declaration that a provision in regulations relating to "cared for" children was "unlawful".
The Child Poverty Action Group (CPAG) said he had accepted its claim that the exception to the rule in the case of cared for children was "perverse because it was only available where the cared for child was the third or subsequent child".
Commenting on the ruling, the charity said the judge's finding meant that "all children looked after by family members claiming tax credits or universal credit will not be taken into account for the purposes of the two-child limit".
CPAG's solicitor, Carla Clarke, said: "This is an important in-road into a flagship welfare reform policy.
"The irrationality of limiting the exception for children cared for in kinship arrangements to third or subsequent children has been raised on numerous occasions by various bodies, yet rather than accepting such legitimate criticisms and removing the restriction, it has required taking the DWP (Department for Work and Pensions) to court for the unlawfulness to be properly recognised."
The group said it intended to appeal against Mr Justice Ouseley's decision to dismiss its "wider challenge to the lawfulness of the two-child rule as breaching fundamental human rights to private and family life and to non-discrimination".
Ms Clarke said: "This is a policy which is not simply about what level of benefits predominantly working families are entitled to.
"Rather, it is a policy which necessarily encroaches upon very personal and intimate decisions about family size and planning and treats some children as less deserving of a benefit intended to meet their basic needs purely because of their birth order.
"We do not agree with the judge's findings on the various human rights arguments and will look to appeal this case further."
In his lengthy written ruling, Mr Justice Ouseley said the case concerned the introduction of a limit to the number of children "in respect of whom child tax credit and its replacement, universal credit, is payable".
That limit - subject to a "few exceptions" - is two, he said, "hence the change is dubbed the 'two child rule' or the 'policy' which is how the defendants described the legislation."
The judge said the claimants "comprise three families in different circumstances, all in receipt of child tax credit, each with a third or subsequent child born on or after April 6 2017, for whom no child tax credit is now available".
During the hearing of the action in February, James Eadie QC, for the Government, "pointed to the Government's aims for the legislation as being to ensure that welfare spending was sustainable, fair to the taxpayer whilst protecting the most vulnerable".
It was to "ensure that people in receipt of benefits should face the same choices as those who supported themselves solely through work and to ensure that the system created incentives to work and to make progress and work as the best route out of poverty".
Although the defendants in the proceedings were Government ministers, said the judge, "this case is very largely about primary legislation and therefore about decisions made in Parliament".
Mr Justice Ouseley announced that - subject to his decision on the issue of the "cared for" child provision - he had found that "the two-child provision is compatible with the European Convention on Human Rights".
A Government spokesman said: "We welcome that the court agrees overall that this policy is lawful.
"We value and recognise the important role of people who look after children who would otherwise be in care. That's why we will be fully reviewing the judgment and considering our next steps with regards to non-parental carers."
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