The movie, which released commercially across the country today, is Amit Masurkar's second directorial venture and features Rajkummar Rao, Pankaj Tripathi, Raghubir Yadav, Anjali Patil and Sanjay Mishra.
It was the unanimous choice of FFI's selection committee, headed by Telugu producer C V Reddy.
" 'Newton' has been selected as India's official entry to the Oscars. It was unanimously chosen from 26 entries this year," FFI secretary general Supran Sen told PTI.
"We are really happy. The fact that the film is releasing today doubles the happiness. We hope that people will now really head to the cinema halls to watch the film," he said.
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For Rao, who has been enjoying a great run in the movies this year, the news was the proverbial "cherry on the cake".
"It is a really honest film and we are already getting an overwhelming response. We will put all our energies to take the film forward," the actor told PTI.
His co-actor Tripathi, who plays a cynical Army officer to Rao's earnest election officer determined to hold elections in a Chhattisgarh village despite the threat of Naxalite violence, was equally thrilled.
Produced by Drishyam Films and distributed by Eros Entertainment, the movie arrived in theatres today to great reviews.
Producer Manish Mundra said there was no greater honour than the Oscars. "And for the news to be announced on the day of Newton's theatrical release across India -- the stars are truly aligning for us," he said in a statement.
No Indian film has ever won an Oscar. The last Indian film that made it to the final five in the Best Foreign Film category list was Ashutosh Gowariker's "Lagaan" in 2001. "Mother India" (1958) and "Salaam Bombay" (1989) are the other two Indian movies to have made it to the top five.
Masurkar's film faces competition from already announced movies such as Angelina Jolie's Cambodian war drama "First They Killed My Father", Pakistan's "Saawan", Sweden's "The Square", Germany's "In the Fade" by Fatih Akin and Chile's "A Fantastic Woman".
The 90th Academy Awards will be held on March 4, 2018, in Los Angeles.