However, the income of a foreign company that is deposited in an Indian bank account is subject to a withholding tax of 40 percent plus other levies, leading to a total take by the authorities of 42.5 percent.
That made the agreement unworkable for Iran and led to the freeze in payments by the refiners until the exemption could be introduced.
Iran will be able to use the rupee funds for a range of expenses - including imports from India, the cost of its missions in the country, direct investment in Indian projects, and its financing of Iranian students in India, according to another government document reviewed by Reuters.
It can also invest the funds in Indian government debt securities. "In the previous round of sanctions Iran was allowed to use funds for imports from India but this time we have expanded the scope for use of funds to benefit both nations," said an Indian government official, who declined to be named because of the sensitivity of the issue.
The move may help India fix its trade balance, which is currently tilted in favour of Iran.
The tax exemption order, though, only refers to crude oil. That means it does not apply to imports of other commodities, such as fertiliser, liquefied petroleum gas and wax.
