J Jayalalithaa, chief minister of Tamil Nadu, announced the decision one day after the country's top court lifted the death sentences on three of those convicted over Gandhi's assassination in 1991.
"Considering that they have spent over 23 years in prison, the cabinet decided to immediately release Santhan, Murugan and Perarivalan under the powers vested with the state government," Jayalalithaa said, according to news agency Press Trust of India (PTI), after holding an emergency cabinet meeting.
Jayalalithaa said she would also release four others including a woman who are serving life sentences for their roles in the murder.
Gandhi was killed by a female Tamil suicide bomber in the southern state of Tamil Nadu.
Jayalalithaa, quoted by PTI, said the cases would be sent to the federal government immediately for its approval of the release as required, since all seven were originally prosecuted by a national agency.
Her administration would go ahead with their release if the Congress-led federal government failed to respond within three days, PTI said.
The Congress party is headed by Rajiv Gandhi's widow Sonia and his son Rahul is the frontman for the party's campaign in elections due by May.
Rajiv's daughter Priyanka Gandhi in 2008 visited one of those jailed in Tamil Nadu for her father's murder, seeking to come to terms with her loss. Sonia has in the past argued against their execution.
Rajiv Gandhi became India's youngest-ever prime minister after his mother, Prime Minister Indira Gandhi, was assassinated in October 1984.
He ruled until losing an election five years later.
On Tuesday the nation's Supreme Court commuted the death sentences of the three men convicted of plotting the murder, citing lengthy delays in the case.
The court said successive Indian presidents had taken 11 years to decide on their pleas for mercy before making a decision against clemency in 2011.
In its ruling the court also suggested that the Tamil Nadu state could now cut the sentences of the three, according to local media reports.
The three were members of the Liberation Tigers of Tamil Eelam (LTTE), a Sri Lankan-based separatist guerrilla movement which was wiped out by Colombo's military in 2009.
Gandhi's killing was seen in India as retaliation for a 1987 Indian government pact with the Sri Lankan government to disarm the guerrillas, who had been trained and armed by New Delhi in the early 1980s.
After that pact, the LTTE fought Indian troops deployed to Sri Lanka by Gandhi's government to supervise the accord.
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@Someone Google Dara singh(Australlian chistian missionary case), he was hanged to death & off-course he was Hindu
@somtimes, afzal guru attacked the parliament of india ,attack on temple of democracy is equal to waging war against the country... no way can u let the person scot-free be Hindu or Muslim wen he killed so many people.
In India, death penalty is only for Muslims. #AfzalGuruShaheed