Gains also tracked upbeat sentiment in other Asian markets which regained some altitude on Tuesday, courtesy a tailwind from Wall Street which sped to historic highs amid a mergers buzz, while gold consolidated its recent rally.
Indian equities are expected to continue edging higher on stable foreign investor flows in the absence of any major cues before December-quarter GDP data due on Friday, although the expiry of February contracts on Wednesday may keep shares volatile in the next session.
Foreign investors have been net buyers in each of the last eight sessions, with inflows totalling $465 million, exchange and regulatory data showed, helping ease concerns about the U.S. Federal Reserve's tapering of its monthly bond buying and the outlook for China's economy.
"F&O expiry drama continues. There was high volatility across the broad which was not visible in flat index movement. Our medium-term view remains intact, that 5,950 is a strong bottom for the market," said Vinod Nair, Head-Fundamental Research, Geojit BNP Paribas Financial Services Ltd.
The benchmark BSE index rose 0.2 percent, or 41.03 points, to end at 20,852.47. The broader NSE index gained 0.23 percent, or 13.95 points, to end at 6,200.05, closing above the psychologically important 6,200 level.
Both the indexes marked their highest close since Jan. 24 for a second consecutive day.
Also, India VIX index hit its lowest intraday level since March 11, 2013, a day ahead of the launch of futures contracts with options volatility easing on improved sentiment, sparked by foreign investor buying over the previous two weeks.
Software services exporters rose on continued optimism about U.S. business outlook after the S&P 500 hit a record intraday high on Monday.
Infosys Ltd shares rose 0.9 percent, Wipro Ltd gained 3.2 percent, while Tata Consultancy Services Ltd ended 0.5 percent higher.
IDFC Ltd shares gained 1.5 percent, while L&T Finance Holdings surged 3.9 percent on hopes of being the leading contenders for banking licences.
An advisory committee is due to give its recommendations on bank licences by this weekend to the central bank.
Gujarat Gas Company Ltd rose 5.5 percent after its board approved a proposed merger with other state-run companies involved in city gas distribution business.
Shares in Indian sugar manufacturers rose after raw sugar futures on ICE soared to three-month highs on Monday on worries about potential crop damage from dry weather in Brazil.
Balrampur Chini Mills gained 2.6 percent while Bajaj Hindusthan rose 0.8 percent.
Ambuja Cements Ltd shares gained 2.5 percent on continued hopes of a price hike.
However, among decliners, Tata Power Company Ltd fell 2.3 percent on profit-taking after rising 5.1 percent on Monday after the regulator allowed it to raise tariffs, while NTPC fell 0.9 percent adding to Monday's 11.8 percent slump as the order was seen as negative for the state-run firm.
FACTORS TO WATCH
* Dollar steadies ahead of US data, nervous Asia eyes yuan weakness
* Oil slips as U.S. warms up but Libyan outages support
* Asia stocks bounce as merger frenzy spurs Wall St
* Foreign institutional investor flows