Pakistan’s Prime Minister Imran Khan said the pilot would be released as a “peace gesture” on Friday. India’s military welcomed the move.
Wing Commander Abhinandan Varthaman’s plane was shot down in the disputed region of Kashmir on Wednesday.
Both countries are under pressure to calm tensions.
At Thursday’s news briefing in Delhi, Indian Air Force officials said they were “extremely happy” that the pilot would be released.
On Tuesday, India struck what it said was a militant camp in Pakistan in retaliation for a suicide bombing that killed at least 40 Indian troops in Kashmir on 14 February.
A Pakistan-based group said it carried out the attack – the deadliest to take place during a three-decade insurgency against Indian rule in Kashmir.
Pakistan – which denies any involvement in the 14 February attack – said it had no choice but to retaliate to the Indian raids with air strikes on Wednesday. That led to a dogfight and the Indian fighter jet being shot down in Pakistan-administered Kashmir.
Tens of thousands of troops remain positioned on either side of the border in the disputed region.
At the height of the tension Pakistan closed its airspace, disrupting major air routes, but is expected to reopen it on Friday.
On Friday, thousands of Indians had gathered at the Wagah border crossing, clutching sweets, banners and garlands as they waited for the pilot’s return, an AFP reporter said.
“We are very happy that the hero of our country is coming back. We have come here to support him,” a man there told AFP.
What did PM Khan say?
“As a peace gesture we are releasing the Indian pilot tomorrow,” Mr Khan told Pakistani lawmakers in the National Assembly on Thursday.
He also repeated his call for the de-escalation of the situation, saying that Pakistan and India “have to live in peace”.
Amid the rapidly escalating tensions, Mr Khan on Wednesday pushed for talks with Delhi to prevent the risk of a “miscalculation” between the nuclear-armed neighbours.
On Wednesday, Indian Foreign Minister Sushma Swaraj said “India does not wish to see further escalation of the situation,” speaking from a meeting with Russian and Chinese foreign ministers in China.
Indian Prime Minister Narendra Modi, who held an urgent meeting with the country’s security chiefs on Wednesday, is yet to publicly comment on the crisis.
Delhi has been demanding an immediate release of the pilot, who is being hailed as a hero in India.
What happened to the pilot?
The Indian Air Force pilot, identified as Wing Commander Abhinandan Varthaman, had been reported “missing in action” by Indian officials.
Images then circulated of his capture, which were both condemned for what appeared to be a physical attack at the hands of residents in Pakistan-controlled Kashmir, and praised for the actions of the Pakistani soldiers who intervened to create a barrier.
Pakistan’s information ministry published – but subsequently deleted – a video showing the blindfolded pilot, who could be heard requesting water, just after he had been captured.
Villagers in Horran threw stones at the pilot, who fired several warning shots in response, eyewitnesses later told the BBC.
What were the air strikes about?
Pakistan’s military spokesman Maj Gen Asif Ghafoor said Pakistan fighter jets had carried out “strikes” in Indian-administered Kashmir on Wednesday.
Two Indian air force jets then responded, crossing the de facto border that divides Kashmir. “Our jets were ready and we shot both of them down,” he said.
Pakistan’s information ministry also tweeted what it said was footage of one of the downed Indian jets.
India’s Ministry of External Affairs spokesman Raveesh Kumar acknowledged the loss of a MiG-21 fighter jet and its pilot.
He also said that an Indian plane had shot down a Pakistani fighter jet, and Indian ground forces observed it falling on the Pakistani side of the LoC.
Pakistan denied any of its jets had been hit.
What is the political fallout?
The sequence of events over the last few days have rapidly shifted from being seen as a boost for the ruling Hindu nationalist Bharatiya Janata Party (BJP) ahead of upcoming parliamentary elections, to a general feeling of disenchantment over the way things have turned out.
On Wednesday evening, when news of the captured pilot dominated headlines, India’s opposition parties issued a statement in which they attacked the ruling BJP of “blatant politicisation of the armed forces’ sacrifices”.
In a series of tweets, India’s finance minister Arun Jaitley hit back, saying the joint statement was “being used by Pakistan to bolster its case”.
There is mounting pressure on Mr Modi – who will face an election by the end of May – to say something about the current situation.
Many have compared his silence to Prime Minister Imran Khan’s public calls to India.