The decision ends speculation that Congress General Secretary Priyanka Gandhi may be fielded in Varanasi.
Ajay Raj had also contested the 2014 Lok Sabha polls from Varanasi and had ranked third with over 75,000 votes, behind AAP leader Arvind Kejriwal.
A Bhumihar by caste, Ajay Raj wields considerable influence over his community in eastern Uttar Pradesh. Party leaders say he is the best bet for the Congress in the region.
The Congress also announced Madhusdan Tiwari as its candidate from Gorakhpur.