Inspector Sharma had been dismissed in 2008.
The state home department has cleared his reinstatement, and he will join the force after some formalities are completed, a senior police official said.
Sharma, who joined the police force in 1983, was credited with several 'encounter' deaths in Mumbai before his dismissal from the service in 2008 for alleged links with the Dawood Ibrahim gang and his role in the Lakhan Bhaiyya fake encounter, the official said.
Sharma was arrested in Lakhan Bhaiyya case in 2010 alongwith 21 others.
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