The cabinet has agreed to raise the royalty rates for iron ore and other minerals, a mining ministry official said, raising the cost for domestic miners, and potentially making imported ore more attractive.
There is a danger for miners that they will be unable to pass on the cost fully to steel mills due to weaker global prices, and the competition from imports, traders said.
The royalty on iron ore, or the percentage of sales paid to state governments, would increase to 15 percent from 10 percent, a spokesman for the mining ministry said.
That would lift the cost for miners by 150 to 250 rupees per tonne ($2.50-$4.00), said Dhruv Goel, managing partner at industry consultancy SteelMint.
"But they will not be able it pass it on completely to steelmakers for the reason that imports will be cheaper and people will prefer imports over domestic ore," said Goel.
The last time the royalties were adjusted was in 2009.
A 30 percent tax on iron ore exports and higher freight charges have made Indian ore less competitive overseas.
Courts' imposition of curbs on mining in key producing states Karnataka and Goa have also slashed supplies from India, which used to be the world's third biggest exporter of iron ore.
The mining bans have forced some Indian steel producers to import ore. JSW Steel, India's third-largest steelmaker, said last month it will import 6 million tonnes of iron ore this fiscal year compared with no shipments a year earlier.
Global iron ore prices have fallen by nearly a third this year, standing at $91.90 a tonne on Thursday, amid a glut stoked by increased shipments from top suppliers Australia and Brazil.