The accord, signed by Indian Aviation Minister Praful Patel and US Transportation Secretary Norman Mineta in New Delhi on Thursday, replaced a 50-year-old treaty that limited flights between the two countries as well as ports of call.
Indian aircraft now operate 28 flights a week to the US with nearly two million passengers travelling between the two countries annually.
"This agreement will result in more services, more options, more innovation and lower prices," Mineta said.
US-based Delta Airlines plans new connections between New York and the southern Indian city of Chennai while Northwest Airlines intends to start flying between Minneapolis and India's IT hub Bangalore.
Air-India will add flights on three
new US routes
Earlier this month, US-based Continental Airlines announced it will launch daily non-stop flights between New Delhi and New York.
Most carriers plying the route between India and the US make stopovers in Europe.
"There's no better symbol for how much closer our two nations are than the fact that travellers will soon be able to step onto a plane in New York and land in New Delhi in a matter of hours," Mineta said.
The large number of Indian immigrants to the United States as well as increased business ties have created a big demand for increased flights.
The agreement was proposed last year by the US, which already has dozens of open skies deals with other countries.
Under the old agreement, India did not allow US-based carriers to increase their flights to the country unless cash-strapped state-run Indian flag carrier Air-India was able to match the increase.
"This agreement will result in more services, more options, more innovation and
US Transportation Secretary
Air-India will add flights to three new US routes - Washington, San Francisco and Houston - following the new agreement, according to Indian officials.
Private Indian airlines, which were until now not allowed to fly to the US, are likely to add US destinations.
After years of allowing only Indian state carriers to fly lucrative long-haul routes, the government in January bowed to burgeoning passenger demand and opened the routes to private airlines.
India's domestic air traffic is growing more than 20% annually and international air traffic is growing at 17%, according to industry figures.