Prime Minister Narendra Modi described the accord between his government and the National Socialist Council of Nagaland as "historic".
The rebels in Nagaland state have been demanding an independent homeland for two million Naga tribespeople.
The group, in India's north-east, have been fighting for more than 60 years.
"I have the deepest admiration for the great Naga people for their extraordinary support to the peace efforts," Mr Modi said, after the agreement was signed at his office in Delhi on Monday.
"Our oldest insurgency is getting resolved, it is a signal to other smaller groups to give up weapons," he added.
The prime minister earlier said that developing India's north-east was a priority for his government. Talks between India's government and the rebels had been taking place since 1997.
Correspondents say many hope the deal will pave the way for similar agreements with other rebel groups in the region.
The agreement was signed by its leader Thuingaleng Muivah, who once led rebel raids from neighbouring Myanmar in what is often described as India's first ethnic rebellion.
The terms of the peace agreement were not immediately known.
The Naga mainly live in Nagaland and also in the states of Manipur, Assam and Arunachal Pradesh.

It also made for some uneasy bedfellows, with one Labour candidate, Toby Perkins, using a widely tweeted picture and quote from Margaret Thatcher to register his opposition to personal attacks.
Mr Miliband said the defence secretary had demeaned himself and his office. But Prime Minister David Cameron said Mr Fallon was "absolutely right".
A glance through the social media accounts of established political party names and official accounts also reveals a good deal of negative campaigning.
Boris Johnson, Mayor of London and Conservative candidate for Uxbridge and South Ruislip, has been leading some of the Conservative attacks via social media, with tweets such as this one:
John Prescott, Labour's former deputy prime minister and prolific tweeter, has also been targeting candidates from his party's opponents.
The Liberal Democrats have also been tweeting their own targeted videos.
With weeks to go in one of the tightest polls in living memory, there may yet be further negative campaigning, but whether it gets quite as personal as previous campaigns - such as these examples below - remains to be seen.
In 2001, Labour was seeking a second term under Tony Blair. It targeted the Conservative leader William Hague by planting Baroness Thatcher's hairstyle on his head, in one of the most notorious campaign posters in living memory. Labour went on to win re-election by a landslide.
Creative photoshopping had already been used by its opponents in 1996, when the Conservatives unveiled this "demon eyes" poster of Tony Blair a year ahead of the 1997 election, which saw Labour sweep to power.
Compiled by Stephen Fottrell.
India's government has signed a peace deal with a leading Naga separatist group, bringing to an end one of the country's oldest insurgencies.
[NEXT_CONCEPT]
Thursday was seen as the day the 2015 UK general election campaign turned negative, with many reacting on social media to Defence Secretary Michael Fallon's attack on Labour leader Ed Miliband.