The pilot, identified as Wing Commander Abhinandan, became the human face of the flare-up over the contested region of Kashmir following the release of videos showing him being captured and later held in custody.
"We are happy our pilot is being released," said Air Vice Marshal RGK Kapoor, at a joint news conference of India's three armed forces on Thursday evening.
He did not say when asked by reporters if India considered the return a de-escalation in the conflict.
Pakistan's Prime Minister Imran Khan said the pilot would be released on Friday, to the relief of many Indians, even as his military reported that four Pakistani civilians had been killed by India firing across the disputed border in Kashmir.
"As a peace gesture we will be releasing him tomorrow," Khan told Pakistan's parliament on Thursday afternoon. Lawmakers thumped their desks in response.
"We will celebrate his release tomorrow," said Vinay Bhardwaj, 34, a plumber in Nawshera, a border town in Indian-controlled Kashmir. "People are very happy about that here."
The United States, China, European Union and other powers have urged restraint from the two nations, as tensions escalated following a suicide car bombing that killed at least 40 Indian paramilitary police in Indian-controlled Kashmir on Feb. 14.
The Muslim-majority Himalayan region has been at the heart of more than 70 years of animosity, since the partition of the British colony of India into the separate countries of Muslim Pakistan and majority Hindu India.
It is divided between India, which rules the Kashmir Valley and the Hindu-dominated region around Jammu city, Pakistan, which controls a wedge of territory in the west, and China, which holds a thinly populated high-altitude area in the north.
On Tuesday, India said it hit a training camp for a Pakistan-based group who claimed responsibility for the suicide attack, and a senior government source told reporters that 300 militants had been killed.
Pakistan denies this, saying the attack was a failure and no one died, with bombs dropped on a largely empty hillside. It denies any militant camp was in the area. Local people said they had seen no sign of major casualties or significant damage, with only one man known to have been slightly hurt by the bombs.
Asked about the damage caused by Indian warplanes in Tuesday's air strike, Kapoor said it was premature to provide details about casualties. But they said they had "credible" evidence of the damage inflicted on the camp by the air strikes.
"Whatever we intended to destroy, we did," he said.