Federal Aviation Minister Ashok Gajapathi Raju described it as a "new beginning" for the loss-making Air India amid expectations that the move could boost the airline's revenues and international presence.
Executives from Star Alliance met with Air India officials in London on Monday and agreed that the airline, which has been attempting to join the group since 2007, would become its 27th member.
"Air India will benefit out of this alliance. Air India's revenues might also go up 4 to 5%," Mr Raju said in New Delhi. "It is a win-win situation for all."
The membership will allow Air India to share routes with other airlines to more than 1,250 destinations in 191 countries.
"We look forward to welcoming Air India passengers to our global network and offering them our alliance benefits," said Jeffrey Goh, Star Alliance chief operating officer.
Air India will add a total of 400 daily flights and 35 new destinations in India to the alliance.
Indian media reports said Air India posted a net loss of 51 billion rupees (27.4 billion baht) in the last financial year.
Air India becomes the first Indian carrier to join the global alliance. Members include major airlines like Singapore Airlines, Lufthansa, Air China, All Nippon Airways, Thai Airways International and Turkish Airlines.