Justice Minister Francisca Van Dunem "has decided not to accept the extradition request" for Singh due to his refugee status, granted in 2000, the ministry said in a statement.
Singh was freed from provisional detention today and will return to Britain, said his Portuguese lawyer Manuel Luis Ferreira.
Singh was arrested under an Interpol warrant in a hotel in Portugal's Algarve region where he was staying with his wife and their four children. He had been held in a jail in Beja, southern Portugal, since late December.
Singh is a leader of the banned Babbar Khalsa International (BKI) and wanted for conspiracy in two 2010 bomb attacks in Punjab and the 2009 killing of Rulda Singh, leader of a Hindu group.
Ferreira said the charges against his client were unfounded and that he had been a victim of torture in India before he was granted asylum in Britain, where he now lives. The lawyer hailed Portugal's decision as "courageous".
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