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The decision was announced by the Cricket Advisory Committee (CAC) comprising former captains Sourav Ganguly, Sachin Tendulkar and veteran batting star V.V.S. Laxman on Tuesday, after the BCCI's Committee of Administrators (CoA) directed it to consult skipper Virat Kohli and announce the name of the coach at the earliest.
A veteran of 80 Tests and 150 One-Day Internationals (ODI), the 55-year-old Shastri had earlier served as the Team Director for India's tour of England in 2014 to the 2016 World T20, where India lost to the eventual champions West Indies.
Shastri was overlooked last year as the CAC went ahead and picked Anil Kumble for a one-year term, that ended on a controversial note after the recently-concluded ICC Champions Trophy, last month.
Shastri's first assignment with the team will be the upcoming Sri Lanka tour, featuring three Tests, five ODIs and a one-off T20 International, starting July 26.
Shastri had initially not applied for the top post but when the Board of Control for Cricket in India (BCCI) extended the deadline for acceptance of applications till July 9, the former all-rounder jumped into the fray and suddenly became the hot favourite, given his cordial relations with Kohli.
Besides Shastri, the CAC had on Monday interviewed four other candidates -- Virender Sehwag, Tom Moody, Richard Pybus and Lalchand Rajput. Former West Indies coach Phil Simmons wasn't available for the interview process.