India's air force needs hundreds of aircraft to replace its Soviet-era fleet, but Prime Minister Narendra Modi's government has said foreign suppliers would have to make the planes in India with a local partner to help build a domestic industrial base and cut outright imports.
India has not opened formal bidding for the jet order, which is expected to be anything from 100 planes to 250.
The agreement is an "intent to partner together to meet India's Make-in-India requirement through the establishment of an F-16 production line in India," Lockheed Martin's leader of F-16 business development, Phil Howard, said on Monday on the sidelines of the Paris Airshow.
But PM Modi's Make-in-India drive runs the risk of conflicting with US President Donald Trump's America First campaign under which he has been pressing for companies to invest in the United States and create jobs instead of setting up factories abroad.
However, Lockheed has met and briefed the current US administration on its plan, and Howard said he had a sense of full support from the Trump administration.
In announcing their agreement at the Paris Airshow, Lockheed and Tata said moving the production base to India would still retain jobs in the United States.
The announcement comes days before PM Modi travels to Washington for a first meeting with Mr Trump, scheduled for June. 26. India and the United States have built a close defence relationship in recent years with Washington emerging as among the top three arms suppliers to India, along with Russia and Israel.
India will also have the chance to export the F-16 that is flown by air forces around the world, the joint statement said. Some 3,200 of these planes are being flown by 26 countries and the model that is being offered to India will be Block 70, the most modern of all the F-16s.
Tata is already building airframe components for the C-130 military transport aircraft.
(Additional reporting by Bangalore Newsroom; Writing by Sanjeev Miglani; Editing by Mark Potter)