Investor sentiments were also high as the country's general inflation slowed to a three-year low in December, raising expectations of a possible rate cut by the Reserve Bank of India, even as industrial output contracted by 0.1 percent in November.
Major indices like information technology (IT), bank, oil and gas, metal and consumer durables made considerable gains.
The 30-scrip sensitive index (Sensex) of the Bombay Stock Exchange (BSE), which opened at 19,689.09 points, closed at 19,906.41 points -- up 242.77 points or 1.23 percent from its previous close at 19,663.64 points.
The BSE Sensex touched an intra-day high of 19,948.63 points and a low of 19,689.09 points.
The midcap index was up 86.18 points, while the smallcap index added 54.89 points.
The wider 50-scrip S&P CNX Nifty of the National Stock Exchange (NSE) also went up, gaining 72.75 points or 1.22 percent at 6,024.05 points.
Finance Minister P. Chidambaram Monday announced that the government would only implement the General Anti-Avoidance Rules (GAAR) from April, 2016, rather than from April 2014.
Meanwhile, latest government data on the country's inflation trend logged 7.18 percent in December, as compared to 7.24 percent in the previous month, owing to softening in power and fuel prices.
Moderation in inflation is expected to give some relief to the policy makers who have been struggling to balance the need for controlling inflationary pressure and stimulate the economic growth.
In the Sensex sectoral indices, IT index was up 160.99 points, followed by bank index, up 155.18 points, oil and gas index, up 138.89 points, metal index, up 137.62 points, and consumer durables index, up 136.29 points.
The IT index gained on the back of better-than-expected earnings by the country's largest software firm Tata Consultancy Services (TCS) which reported a 23 percent rise in quarterly profit.
Among the index losers were the auto index, down by 52.95 points, and the healthcare index, down 4.72 points.
The major Sensex gainers were ONGC, up 4.28 percent at Rs.304.50; Infosys, up 3.49 percent at Rs.2,807.25; Jindal Steel, up 3.34 percent at Rs.446.55, TCS, up 2.14 percent at Rs.1,334.30 and HDFC, up 1.93 percent at Rs.825.20.
Only nine of the 30 scrips in the Sensex closed in red.
The main losers were Maruti Suzuki, down 1.72 percent at Rs.1,539.05; Cipla, down 1.23 percent at Rs.416.20; Bajaj Auto, down 1.14 percent at Rs.2,092.80; Tata Motors, down 0.65 percent at Rs.328.00 and Mahindra and Mahindra, down 0.64 percent at Rs.935.25.
Among other Asian markets, Japan's Nikkei index was up 1.40 percent, while Hong Kong's Hang Seng ended 0.64 percent higher. The Shanghai Composite Index rose by 3.06 percent.
In Europe, Britain's FTSE 100 was up 0.15 percent and the German DAX was trading 0.56 percent higher. The French CAC 40 was also up 0.42 percent.
