The ban on the movie "Vishwaroopam" by the southern state government was ordered removed by the state's high court in the capital Chennai, the Press Trust of India news agency reported.
The movie made by popular Kamal Hassan, who is also its main star, reportedly cost about 1 billion Indian rupees or about $20 million.
The ban had raised a controversy across the country, even as some Muslim groups opposed the movie, alleging it negatively portrayed Muslims and expressing concern about its impact on communal peace.
Hassan has maintained "Vishwaroopam" is a Muslim-friendly film. His stand was supported by the censor board, the BBC reported.
PTI said the state government may appeal the ruling by Justice K. Venkataraman.
The report said during court hearing, the state government questioned the movie's "UA" certificate and urged an investigation into it. It was alleged the certificate was not issued by Indian censors but by an examining committee.
But the allegation was rejected by the prosecution.
In an earlier editorial, the respected Hindu newspaper said: "The delay in overturning the unjustifiable ban on Kamal Haasan's Vishwaroopam is beginning to appear every bit as unjustifiable."
It said the ban must be quashed and the police directed to provide adequate protection to theaters and moviegoers.
"While it is the right of the fringe Muslim groups who are offended, seemingly or otherwise, to protest against the film, any demonstration should be staged only peacefully. Anyone who threatens or takes recourse to violence deserves to be dealt with strictly and punitively."