Lipstick Under My Burkha was earlier refused certification because it was too "lady oriented" and contained sexual scenes and abusive language.
The film examines the lives of four women from small town India.
The appeals board has given the film an adult certification and asked the directors to make some cuts.
The film, starring Konkona Sen Sharma and Ratna Pathak Shah, had its world premiere in Tokyo a few months ago and has since then won several awards at global film festivals.
The appeals board said the film would be granted adult certification with "voluntary and some additional cuts and deletions".
It also asked the filmmaker to mute a few Hindi words - including one referring to prostitutes - from a couple of scenes, a report said.
The Central Board of Film Certification had earlier complained that the film "has abusive words, audio pornography [meaning phone sex], and a bit sensitive touch about one particular section of society [implying it could hurt Muslim religious sentiments]".
The film's director Alankrita Shrivastava had described the ban as an assault on women's rights, and challenged it in the appeals court.
She told the BBC's World Tonight programme that the censors were "bothered" by the film's female point of view.
Film censorship in India has always been quite erratic but the censor board has faced increasing criticism in recent years from the film industry, which accuses it of being irrational, making decisions on an ad hoc basis and being in conflict with India's changing society, says the BBC's Geeta Pandey.
Last year, India's censor board had asked the makers of a Hindi film, Udta Punjab, to make 94 cuts, including removal of expletives, references to cities in Punjab and any shots of drugs being consumed, ironically in a film about drug abuse.
But director Anurag Kashyup and other producers decided to challenge the order in a Mumbai court, which eventually allowed the film's release with just one cut - a shot of lead actor Shahid Kapoor's character urinating in a crowd.
In 2015, the censor board asked the producers of Hindi thriller NH10 to shorten the duration of a violent scene that showed honour killing, had the word "lesbian" muted in romantic comedy Dum Laga Ke Haisha and banned erotic romance Fifty Shades of Grey despite the producers offering to make cuts.
The board also shortened the duration of two kissing scenes in Daniel Craig's Spectre before giving it an adult certification.

They were named artists of the year and also took home album of the year and favourite pop/rock album.
"This has been a real perfect day... America feels like a second home to us," said Liam Payne.
Katy Perry, who did not appear at the ceremony in Los Angeles, also won three awards, including one for best single for Dark Horse featuring Juicy J.
The awards, many of which are decided by a fan vote, also saw Taylor Swift speak out again in defence of traditional models of music distribution.
The singer, who was presented the Dick Clark award for excellence by Motown musician Diana Ross, thanked fans for acknowledging her campaign.
"What you did by going out and investing in music and albums is you're saying that you believe in the same thing that I believe in - that music is valuable and that music should be consumed in albums, and albums should be consumed as art and appreciated," she said.
After the release of 1989, Swift removed all of her albums from Spotify, saying the streaming service devalued music and did not pay artists enough.
Iggy Azalea beat the likes of Eminem and Drake to the title of favourite rap/hip hop artist.
"This award is the first award I've ever won in my entire life, and it means so much to me that it is for best hip hop because that's what inspired me to move to America and pursue my dreams, and it's what helped me when I was a teenager to escape and to get through my life and to better times," the 24-year-old said.
"And it means so much that I can stand here against Eminem and Drake and come out with this."
Calvin Harris and Sam Smith took home favourite artist awards in the EDM and pop/rock categories. Frozen was named best soundtrack.
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An appeals board of India's film censor authority has cleared an award-winning Hindi language film for limited release.
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One Direction have topped the winners list at the American Music Awards, taking home a total of three prizes.