India has raised spending on its military by 7.8 per cent to $21.3bn for the next fiscal year beginning from April, according to the government's budget announcement.
India's military has planned a massive modernisation of its mainly 1990s-era weapons systems.
The plans, announced on Wednesday, include the purchase of 126 new combat aircraft to replace an ageing fleet of MiG-21s.
The budget for the fiscal year starting April 1 comes as India and Pakistan remain engaged in a peace process which began in January 2004 that has defused tension over disputed Kashmir, the cause of two of their three wars.
India's million-plus army, the world's fourth largest, received the lion's share of the funds.
But new arms purchases have prompted international attention, with US-based Lockheed-Martin's F-16 competing for the 126 multi-role fighter jets along with US rival Boeing's F-18, the Rafale made by French Dassault, the Eurofighter and the Russian-built MiG-35 and MiG-29.
Nuclear deal
The US emerged as a potential military supplier to India after the two countries signed a landmark deal on civilian energy co-operation last year that lifted decades of arms and technology sale sanctions on New Delhi.
Under the deal, India has pledged to separate its civilian and military nuclear facilities and place the former under UN inspection. India tested nuclear weapons in May 1998, a move immediately followed by Pakistan.
India is Asia's biggest arms buyer and has spent billions of dollars in the past few years on purchases of jet fighters, radar and ships from Britain, Israel, France and Russia among others.