Gains also tracked upbeat sentiment in other Asian markets which regained some altitude on Tuesday, courtesy a tailwind from Wall Street which sped to historic highs amid a mergers buzz, while gold consolidated its recent rally.
Indian equities are expected to continue edging higher on stable foreign investor flows in the absence of any major cues before December-quarter GDP data due on Friday, although the expiry of February contracts on Wednesday may keep shares volatile in the next session.
Foreign investors have been net buyers in each of the last eight sessions, with inflows totalling $465 million, exchange and regulatory data showed, helping ease concerns about the US Federal Reserve's tapering of its monthly bond buying and the outlook for China's economy.
The Sensex rose 0.2 per cent, or 41.03 points, to end at 20,852.47.The Nifty gained 0.23 per cent, or 13.95 points, to end at 6,200.05, closing above the psychologically important 6,200 level.Both the indexes marked their highest close since January 24 for a second consecutive day.
Also, India VIX index hit its lowest intraday level since March 11, 2013, a day ahead of the launch of futures contracts with options volatility easing on improved sentiment, sparked by foreign investor buying over the previous two weeks.
Software services exporters rose on continued optimism about US business outlook after the S&P 500 hit a record intraday high on Monday.
Infosys shares rose 0.9 per cent, Wipro gained 3.2 per cent, while Tata Consultancy Services ended 0.5 per cent higher.
IDFC shares gained 1.5 per cent, while L&T Finance Holdings surged 3.9 per cent on hopes of being the leading contenders for banking licences.
An advisory committee is due to give its recommendations on bank licences by this weekend to the RBI, the Business Standard newspaper said on Tuesday, citing Financial Services Secretary, Rajiv Takru.
Gujarat Gas Company rose 5.5 per cent after its board approved a proposed merger with other state-run companies involved in city gas distribution business.
Shares in sugar manufacturers rose after raw sugar futures on ICE soared to three-month highs on Monday on worries about potential crop damage from dry weather in Brazil.
Balrampur Chini Mills gained 2.6 per cent while Bajaj Hindusthan rose 0.8 per cent.
Ambuja Cements shares gained 2.5 per cent on continued hopes of a price hike.
However, among decliners, Tata Power Company fell 2.3 per cent on profit-taking after rising 5.1 per cent on Monday after the regulator allowed it to raise tariffs, while NTPC fell 0.9 per cent adding to Monday's 11.8 per cent slump as the order was seen as negative for the state-run firm.