Read has not played since April due a broken thumb, but the All Blacks skipper has recovered in time to feature against Warren Gatland's men in Auckland.
Ardie Savea drops to the bench to accommodate Read at number eight, while Ioane gets his first start on the left wing as Julian Savea misses out completely.
Centre Ryan Crotty also returns from injury to take his place in Steve Hansen's team, so Anton Lienert-Brown is among the replacements for the opening Test of three.
Iaone, 20, has already faced the Lions twice, impressing in a victory for the Blues and featuring in the Maori All Blacks' loss last weekend, and is a surprise inclusion in the line-up.
Julian Savea is only three tries short of becoming the joint-leading New Zealand Test try-scorer, but he will not be getting any closer to Doug Howlett's tally of 49 this weekend.
Hansen will announce on Thursday whether Aaron Cruden or Lima Sopoaga will take a place on the bench as cover for fly-half Beauden Barrett.
All Blacks head coach Hansen said: "This was a really tough team to pick because there were a number of players in great form vying for positions. But in the end the three selectors felt this was the best combination to take on the Lions in the first Test.
"There's a real understanding that this is a once-in-a-lifetime opportunity. The players are well aware of the history of the All Blacks and the Lions and are determined to respect that history with their performances."
New Zealand team: Ben Smith, Israel Dagg, Ryan Crotty, Sonny Bill Williams, Rieko Ioane, Beauden Barrett, Aaron Smith; Joe Moody, Codie Taylor, Owen Franks, Brodie Retallick, Sam Whitelock, Jerome Kaino, Sam Cane, Kieran Read (captain).
Replacements: Nathan Harris, Wyatt Crockett, Charlie Faumuina, Scott Barrett, Ardie Savea, TJ Perenara, Aaron Cruden/Lima Sopoaga, Anton Lienert-Brown.