The decision, which will be implemented in March, means that the flights from New Delhi to Tel Aviv would be shortened by two and a half hours.
The new route, Haaretz said, means that the airline would reduce fuel costs and sell cheaper tickets to passengers.
The Saudi government had banned flights headed to Israel from using its airspace for 70 years. While it is no secret that private jets can fly from Saudi and other Gulf airports to Israel, they could not use the direct route and had to make a stop-over in Amman airport first.
The move is seen as a nod to India's Prime Minister Narendra Modi's influence in the region, who is expected to land in the occupied West Bank on February 10. Last year, he became the first Indian premier to go to Israel on an official state visit.
But the decision also signifies warmer ties between Israel and Saudi Arabia, who have been linked to having increasingly covert relations over the last year.
This has been credited to the shakeup of Saudi domestic and foreign policy, spearheaded by the young and ambitious Crown Prince Mohammed bin Salman.
"The political changes in Saudi Arabia and the desire to consolidate power is the main reason why these relations with Israel were opened," Mahjoob Zweiri, an associate professor with the Gulf Studies Program department at Qatar University, previously told Al Jazeera.
Source: Al Jazeera News