The IOC executive board reinstated the Indian body after it held a new ballot that complied with international Olympic ethics rules barring corruption-tainted officials from running for election.
It is the first time in history that a suspension of a national Olympic body has been lifted during the games.
India had been suspended in December 2012 for electing scandal-tainted officials, a major embarrassment for the world's second most populous nation.
IOC spokesman Mark Adams said the lifting of the suspension takes immediate effect, meaning the athletes are now free to compete for India.
India's three athletes marched into the opening ceremony last Friday under the Olympic flag and were allowed to compete as independent athletes.
A special ceremony will be held in the Olympic Village to raise the Indian flag.
The decision came too late for India's top winter sports athlete, luger Shiva Keshavan. He competed already, finishing 37th in a 39-man field.
India also a cross-country skier, Nadeem Iqbal, and a slalom skier Hamanshu Thakur.
The team will be able to parade behind the Indian flag at the closing ceremony on Feb. 23
Adams said the IOC was satisfied with the changes after the Indian Olympic Association held elections on Sunday and installed world squash chief Narayna Ramachandran as president.
The suspension was ordered after it IOA elected Abhay Chautala as president and Lalit Bhanot as secretary-general.
Bhanot spent 10 months in jail on corruption charges stemming from the organization of the 2010 Commonwealth Games in New Delhi, while Chautala is charged in a recruitment scam not related to sport. Both men deny any wrongdoing.
Both were ineligible to stand this time, according to the new constitution.
IOC member Randhir Singh, a former secretary-general of the Indian Olympic body, told The Associated Press the reinstatement to the Olympics is "great news for Indian sport."
"It's time everyone understands that the Olympic charter is supreme," Singh told the AP in a telephone interview. "It is important that sport is run well and tainted officials are kept out in a country of 1.2 billion in which 40 per cent is youth."
Ramachandran heads the new Indian committee, with Rajeev Mehta becoming secretary general and Anil Khanna elected as treasurer.
Ramachandran, who served as treasurer of the IOA from 2008-12, is the younger brother of Narainswamy Srinivasan, who is the president of the Board of Control for Cricket in India and is set to become chairman of the International Cricket Council.