The Cabinet Committee on Economic Affairs (CCEA) chaired by Prime Minister Narendra Modi okayed the proposal for the hike but maintains Indian management control.
A senior government official who did not want to be named said the overseas investments in the insurance sector would be allowed through the Foreign Investment Promotion Board (FIPB) route.
In the budget for 2014-15 presented earlier this month, Finance Minister Arun Jaitley had proposed to hike the overseas investment limit in the insurance sector to 49 percent.
Welcoming the government's move, Confederation of Indian Industry (CII) director general Chandrajit Banerjee said the increase in FDI limit "will help attracting the much needed long term capital for the sector which can have multiplier effect on the state of economy especially in meeting the huge infrastructure financing requirements".
Capital infusion in the insurance sector, through greater FDI, would ensure innovations on product design and distribution, better risk management, introducing superior technology and greater investments.
CII said the end result will be sizeable improvement in the insurance penetration and density for the Indian economy which is considerably lower when compared with other emerging economies.