A lawyer for Jet Airways, Harish Salve, told journalists: "The important thing is that there was a dispute and it has been settled amicably by both sides."
Mr Salve said the agreement was confidential and that he could not reveal much except that Jet had bought all Air Sahara shares.
In 2006, Jet Airways announced it would pay $500m to buy Air Sahara. But the deal fell apart after Jet Airways failed to get the necessary regulatory approval.
The airline at the time said it would not go through with the acquisition in the interests of its shareholders.
Air Sahara argued the agreement should be honoured and demanded compensation from Jet Airways.
An arbitration panel was set up to hear the case, and it recommended the two parties come to some sort of an agreement among themselves.
Jet Airways, founded by London-based former travel agent Naresh Goyal, controls about 24.5% of the Indian domestic aviation market.
Air Sahara, owned by reclusive businessman Subroto Roy, controls about 7%.
Aviation expert Kapil Kaul said the new deal was good news for Sahara who had achieved an "honourable" exit from negotiations.
"They are the biggest gainers... It's strategically very, very important for Sahara.
"For Jet Airways, I think that they are trying to project it as a good deal, like a 40% off from what they had discussed earlier.
"Since there is no large cash up-front, the deal debate is better than what was originally estimated. However, overall it is going to add to their challenges in a very complex environment." India's largest private airline, Jet Airways, says it has agreed to buy out its smaller rival, Air Sahara, for 14.5 billion rupees ($340m).
Jet Airways has already paid Sahara $116m. It will make a further payment of $83m before 20 April and the rest will be paid in annual instalments.
The deal gives the airline a combined domestic market share of about 32%.
Jet's attempt to buy Air Sahara last year collapsed, but the company says the new deal has been reached amicably.
Both airlines also fly to international destinations.
'Amicable'
"This deal is definitely going to be good for the shareholders," Jet Airways founder and chairman Naresh Goyal said at a press conference in Mumbai (Bombay), India's financial capital.
Source: BBC News
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