"His fiction is endowed with extraordinary depth and substance through his academic training as a historian and a social anthropologist," a statement from Bharatiya Jnanpith read.
The decision was taken in a meeting of Jnanpith Selection Board chaired by eminent novelist, scholar and Jnanpith laureate Pratibha Ray.
Ghosh, one of the most prominent contemporary Indian writers, is known for a series of novels such as "Shadow Lines", "The Glass Palace", "The Hungry Tide", and Ibis Trilogy -- "Sea of Poppies", "River of Smoke", and "Flood of Fire" -- chronicling the Opium trade between India and China run by the East India Company.
The writer, in a tweet, said he was "honored and humbled".
In another tweet responding to a fan, he said, "this is an amazing day for me. I never thought I would find myself on this list, with some of the writers I most admire."
Born in Kolkata in 1956 to a Bengali Hindu family, the 62-year-old author currently lives in New York with his wife Deborah Baker.
Ghosh, who spent his formative years in India, Bangladesh and Sri Lanka, studied in Delhi, Oxford and Alexandria.
His most recent book, "The Great Derangement; Climate Change and the Unthinkable, a work of non-fiction", was released in 2016.
Ghosh is also recipient of the Padma Shri and Sahitya Akademi Award.
Some of the biggest Indian writers have been awarded with this prestigious literary recognition. Major names among the 58 recipients include literary icons Krishna Sobti, Kedarnath Singh, Shrilal Shukla, Nirmal Verma, Girish Karnad, Mahasweta Devi, Amrita Pritam and U R Ananthamurthy.