Under the latest offer, which comes a month after Taro rejected an earlier bid, Sun Pharmaceutical will pay $571 million to buy about a third of Taro's 44.5 million shares at $39.50 a share, up from an offer of $24.50 a share.
Mumbai-based Sun Pharma, India's top drugmaker by market value, said in a statement it planned to delist Taro from the New York Stock Exchange once the buy-out process was completed.
Taro said in a statement its board of directors had approved the sweetened offer.
"It's a positive move because this will help Sun Pharma bring Taro to its own levels and also run the US business more efficiently," said Deepak Malik, analyst at brokerage Emkay.
"The price offered is market driven and hence is a fair price," he said.
Sun Pharmaceutical and its affiliates own about 66 per cent of Taro's ordinary shares and 100 per cent of the shares of Taro's founders, representing about 77.5 per cent of the outstanding voting power in Taro.
Sun Pharma last week reported a 59 per cent rise in quarterly net profit at Rs 796 crore as sales in its key US market surged, helped by a robust performance by Taro.
Shares in Sun Pharma were up 0.8 per cent at Rs 680.8 rupees by 0524 GMT on Monday. Shares of Taro closed at $41.10 Friday on the New York Stock Exchange.