Defence Minister Manohar Parrikar and his French counterpart Jean-Yves Le Drian signed the agreement in this regard here.
The deal was preceded by tough negotiations over the price and is expected to cost India some 7.87 billion euros. The deal also has a provision for transfer of technology through offsets.
Soon after the deal was signed, Parrikar said in a tweet: "Will significantly improve India's strike and defence capabilities."
The tough price negotiations led to a delay in the finalisation of the deal, which covers delivery of 36 planes, spares and weapons.
The fighter plane will be equipped with Meteor, a beyond-visual range air-to-air missile expected to considerably advance IAF's capability in aerial combat.
The Rafale aircraft would have advanced features like advanced electronically scanned array radar, mid-air refuelling and advanced electronic warfare equipment.
Informed sources said the jets would arrive in India in batches, with the first two coming in the next few months.
A team from France was camping in New Delhi for some weeks for negotiating the deal.
India had decided to ink the deal for 126 Rafale jets in 2012 during the previous United Progressive Alliance government. The deal was estimated to cost $10.2 billion and the plan was to acquire 18 aircraft in fly-away condition and manufacturing the rest in India.
However, during Prime Minister Narendra Modi's visit to France in April last year, India conveyed that it would like to acquire 36 Rafale jets in fly-away condition as quickly as possible in view of the IAF's critical operational necessity for the multi-role combat aircraft.
A Memorandum of Understanding was signed with France in January this year for the purchase of 36 Rafale aircraft.