A neutral expert appointed by the World Bank on Monday cleared the Baglihar Power Project over the Chenab in Jammu and Kashmir.
The expert asked India to reduce the height of the dam by 1.5 metres, one of the objections raised by Pakistan.
Richard Lafitte, in his final report handed over to Indian and Pakistani diplomats in Bern, Switzerland, overruled Pakistan's other technical objections.
The dam's height was originally proposed to be 144.5 metres.
Radhika Lokesh, charge de affairs of the Indian embassy in Switzerland received the report on behalf of the government and forwarded it to New Delhi.
Both countries were awaiting the decision keenly.
Pakistan had in 2005 sought intervention of the World Bank, which is the third party to the 1960 Indus Water Treaty, alleging that construction of the project violated the accord.
India has rejected the charge.
According to the provisions of the treaty, the neutral expert's decision on all matters will be final and binding.
In electricity-deficit Jammu and Kashmir the 450-MW power project will come as a big relief. The complete project is designed to produce 900 MW of power.
Pakistan has opposed the construction of the project, particularly the design and height of the dam.
Prior to the final meeting with representatives of the two countries on November 7, Lafitte had circulated to India and Pakistan a draft containing his conclusions on the arbitration, which upheld New Delhi's view on the issue.
The arbitrator was slated to give his final determination by the end of last year but had put it off till February this year after Pakistan took strong exception to his circulated draft.
Pakistan has said it will abide by the verdict.
"The neutral expert's verdict is binding," Pakistan Foreign Office spokesperson Tasnim Aslam said.
Asked why the two countries could not resolve the differences through the dialogue process, she defended Islamabad's decision to approach the World Bank, saying, "There is a provision in the Indus Waters Treaty on the basis of which we sought the role of the neutral expert."
