Bangladesh, the largest it has offered to any country in 2010.
Finance minister Pranab Mukherjee said on Sunday that New Delhi had decided to consider $200 million of that amount as a grant rather than credit, and Bangladesh can utilise the fund for its priority projects.
"India will treat the amount as grant, not credit," Mukherjee told a group of senior editors as he wound up a 20-hour trip to Dhaka.
"This $200 million will be utilised for projects that Bangladesh prioritises," he said.
The rest $800 million will bear a one per cent interest, instead of previously announced 1.75%, according to bdnews24.
Mukherjee also cited "ground realities" of coalition politics as the reason for India's failure to seal the Teesta water sharing deal during Prime Minister Manmohan Singh's visit to Bangladesh last year.
"In a democracy such as ours... this process often becomes time consuming," he said.
"There are certain issues that need to be resolved," he said while referring to the Teesta issue as a "sensitive" one.
Earlier, during his meeting with Premier Sheikh Hasina, Mukherjee vowed to implement all agreements signed with the country during Manmohan Singh's visit last year.
"Although it was late, (all) these agreements (signed with Bangladesh) will be materialised soon," he was quoted as telling Hasina by a Prime Minister's office spokesman.
India and Bangladesh could not sign a much talked about water sharing deal on Teesta river last year as West Bengal chief minister Mamata Banerjee's last minute opposition to the deal scuttled what would have been a landmark agreement.
While the Teesta episode did not go down well with Bangladesh, there were also allegations on delays in delivering on the promised projects.
Mukherjee defended the work done so far and pointed out that five contracts worth $834 million had already been signed.
Hasina's press secretary Abul Kalam Azad said Mukherjee told the Premier that a sub-committee will be formed comprising experts of both the countries to study and analyse all things to remove confusions about the proposed Tipaimukh dam on Barak river in Manipur.
"Everyone has legitimate share with regard to indifferent river water and no country will be affected due to the agreement. All countries will get due share of water," he said.
He assured that India would take "no unilateral action that would harm Bangladesh".
The finance minister arrived in Dhaka last evening on a two-day tour to join the 150th birth anniversary celebrations of Rabindranath Tagore.