"The government of India has reviewed the policy... and decided to permit a citizen of Pakistan or an entity incorporated in Pakistan to make investments in India," said a statement from the ministry.
A ban on investments in defence, space and atomic energy will remain and all propositions must be notified to the Indian government.
The decision to accept foreign direct investment from Pakistan was taken in April this year when the trade ministers of the nuclear-armed South Asian rivals met in New Delhi.
They also discussed ways to ease visa curbs on business travel and the possibility of allowing banks from both countries to open cross-border branches.
Pakistan said that Indian government's decision to allow Pakistan's direct foreign investment in India was “a positive step”.
India and Pakistan, which have fought three wars since independence, are channelling their efforts into "trade diplomacy" in a bid to build enough trust to tackle the more troublesome issues that divide them, such as Kashmir.
The improved relations between the rivals stem from Pakistan's decision to grant India "Most Favoured Nation (MFN)" status by year end, meaning Indian exports will be treated the same as those from other nations.
In further progress, the neighbours opened a second trading gate in April along their heavily militarised border, boosting the number of trucks able to cross daily to 600 from 150.
COMMENTS
Comments are moderated and generally will be posted if they are on-topic and not abusive.
For more information, please see our Comments FAQ