The food regulator will agree to drop its ban on this understanding, the sources said on Monday, in what is one of the world's largest spirits drink markets.
Diageo's India unit, United Spirits (UNSP.NS), and the Food Safety and Standards Authority of India did not immediately respond to requests for comment.
Reuters is first to report the decision.
In India's biggest food safety crackdown in years, the regulator shocked the $40 billion industry early this month by banning several whisky and rum brands of Diageo and some other Indian companies, alleging mislabelling and improper addition of flavours - like rum flavour in rum. Diageo, which has dubbed India its "consumer market of the decade", had said it complies with the law.
The whisky ban covered Diageo's hugely popular Antiquity Blue and Royal Challenge whisky made in Madhya Pradesh state, and its McDowell's No. 1 Celebration Matured XXX Rum made in Maharashtra.
Diageo has agreed to reformulate its drinks to stop adding whisky flavour in whisky or rum flavour in rum, said the government sources, who declined to be named as the decision is private.
TOP-SELLING PRODUCT
The changes will be required to these brands made anywhere in India, not only the states where they were restricted earlier, said the first government source.
Domestically made Royal Challenge is one of Diageo's top-selling products in India. Over 4.5 million nine-litre cases of Royal Challenge are sold every year in the country, Diageo says, calling it a product of the "mid prestige price segment".
The whisky's front label says: "A rich blend of Indian grain spirit & imported scotches, matured in American oak casks". Its back label says it contains "demineralised water, grain neutral spirit, Scotch. Contains permitted natural colour ... and added nature identical (whisky) flavouring substances".
The government sources said that while Diageo transitions to reformulation of its products, it has agreed to make clear via front-of-pack labels in the meantime to spell out clearly what flavouring has been added to the spirits.
Separately, Indian inspectors have seized around 18,000 boxes of Diageo liquor bottles for allegedly lacking markings to show they were made using safe recycled plastic, widening the scrutiny, Reuters reported last week.
