The so-called "Chennai Six" had been arrested in October 2013 and sentenced for carrying arms on a commercial US ship.
They were held while working for an anti-piracy security company protecting commercial ships off the coast of Africa in the Indian Ocean and have pleaded their innocence ever since.
"This case has been top priority for everybody at the Foreign Office and today's verdict is fantastic news," UK Foreign Secretary Boris Johnson said in a statement.
"The importance the UK government places on their case cannot be understated. The men, their families and their supporters, who have campaigned unrelentingly, must be overjoyed. I share their delight and I hope they can return home as soon as possible," he added.
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The Indian High Commission in London also welcomed the ruling, stressing that it highlights India's reputation as a democratic nation with a free and fair judiciary.
Yvonne MacHugh, the fiancee of Billy Irvingone of the men who was caught up in the controversy, expressed her relief that her partner would be able to connect with his son William, whose birth he had missed while in prison.
"I just feel sheer relief finally we are getting our family back together," said MacHugh.
"Finally all the men are going to be home with their families. They have been acquitted of all charges, so they have done no wrongdoing and finally we have proven that," she said.
The Madurai bench directed that all crew members of the ship MV Seaman Guard Ohio can apply to the Indian authorities to get back their passports after which they will be able to travel home to the UK.
"They still need to get police clearance before they can come home, so there are steps being taken to try to ensure that everything's in place," said Joanne Tomlinson, the sister of John Armstrong, another of the ex-soldiers.
Besides Armstrong and Irving, the other former British soldiers who have been in a Chennai jail for four years include - NickDunn, Ray Tindall, Paul Towers, and Nicholas Simpson.
In October 2013, Coast Guard personnel boarded their vessel and arrested them along with 29 other crew members for taking weapons into India's territorial waters.
The charges were initially quashed when the men argued the weapons were lawfully held for anti-piracy purposes and their paperwork, issued by theUK government, was in order.
Since then there have been a series of appeals, including by British Prime Minister Theresa May who raised the matter with her Indian counterpart Narendra Modi during her visit to India in November 2016 as well as Britain's High Commissioner in India, Dominic Asquith, visiting the men injailinChennai.
The sailors were aboard the American-owned ship which reportedly offered armed protection to vessels sailing through an area known as "Pirates' Alley" between the Indian Ocean and the Red Sea.
US firm 'AdvanFort International', which owns the ship, has maintained that the vessel was involved in anti-piracy operations and had not strayed into Indian waters.