The decision to give a go-ahead to the project was taken at a meeting of the Defence Acquisition Council (DAC), the ministry's highest decision-making body on procurement, defence ministry sources said.
The modernisation of the armoured vehicles will enhance their overall performance besides enabling them to fully operate at night.
The DAC, chaired by Defence Minister Arun Jaitley, also approved procurement of 'carrier command post vehicles' for the Army at a total cost of Rs 406 crore, they said.
The modernisation of the armoured fighting vehicles will be carried out by the state-run Ordnance Factory at Medak in in Telangana. The army has nearly 2,500 such vehicles.
The carrier command post vehicles will also be supplied to the Army by the Medak Ordnance Factory.
The sources said the DAC also deliberated on a number of other procurement cases and issued directions to ensure smooth progress in the acquisition process.