The decision was taken during a meeting of senior cabinet ministers chaired by Prime Minister Manmohan Singh.
In another decision, the government also cleared the much-awaited 100 percent foreign direct investment (FDI) in the telecom sector from the existing 74 percent.
Talking to reporters after the meeting, Commerce and Industry Minister Anand Sharma said the foreign direct investment limit in insurance sector will be hiked to 49 percent from the existing 26 percent.
In multi-brand retail, upto 49 percent overseas investment would now be allowed through automatic route.
Under the existing policy, FDI in multi-brand retail sector is allowed after approval from the Foreign Investment Promotion Board (FIPB).
Sharma said the government has decided to liberalise norms for multi-brand retail sector on growing demands from the overseas retails.