The Kashmir Reader, an English-language daily, was ordered to stop publishing in early October after weeks of unrest.
The paper was accused of "inciting violence". But the government said on Monday that "there was no further need to disallow its publication".
Rights groups had said the ban was an attack on the freedom of the press.
The daily's editor, Hilal Mir, told the BBC that "a wrong had been rectified".
"I feel like we have been released from jail. It's like being born again. The ban period was tough, but my staff stood by me. I am glad that the government has lifted an unjust ban," he said.
Kashmir newspaper ban criticised
The four-year-old Kashmir Reader, which is published in Srinagar, is well-known in the region.
It was banned after weeks of violence, sparked by the killing of prominent separatist militant Burhan Wani by Indian security forces.
More than 80 people have been killed in clashes between protesters and security forces and thousands more have been injured in Kashmir since July.
There has been relative calm, however, in the past few weeks.
Disputed Kashmir is claimed in its entirety by both India and Pakistan and has been a flashpoint for more than 60 years, sparking two wars between the countries.
Within the disputed Muslim-majority territory, some militant groups have taken up arms to fight for independence from Indian rule or a merger with Pakistan.
A prominent newspaper in Indian-administered Kashmir has resumed publication after the government lifted a ban of nearly three months.