Updated Thu 27 Mar 2014, 8:49am AEDT
A statement from the Attorney-General's Department says the National Gallery has voluntarily removed the Shiva Nataraja, or Dancing Shiva, from display.
Indian police believe the 900-year-old statue was stolen from a temple in Tamil Nadu as part of a multi-million-dollar heist by disgraced New York art dealer Subhash Kapoor.
On Monday, Four Corners revealed fresh claims that the sole expert who the NGA says it consulted when deciding whether or not to purchase the Shiva, categorically denied giving advice on the purchase to the NGA.
In the Four Corners report, George Brandis, the Attorney-General and Minister for the Arts, strongly criticised the NGA for its decision to buy the artefact.
The statue has been on display at the Canberra gallery since 2008, when it was sold to the gallery by Kapoor for $5.6 million.
Kapoor is currently on trial in Chennai for allegedly ordering the theft of 28 artefacts from two Indian temples.
Kapoor's manager has already admitted to New York's Supreme Court that the Shiva was stolen.
The gallery has maintained it ran appropriate provenance checks before buying the statue and had said it would continue to display the piece while investigations continued.
However, the Indian government has formally requested the statue's return and it will now be returned to India in line with Australia's international obligations.
"The request states that the statue was exported from India in contravention of cultural property laws, namely India's Antiquity and Art Treasures Act 1972," the Attorney-General's Department said.
"Australia is a signatory to the 1970 UNESCO Convention on the Means of Prohibiting and Preventing the Illicit Import, Export and Transfer of Ownership of Cultural Property.
"Our obligations are implemented through the PMCH Act and the Indian government’s request is being actioned in accordance with that act."