The court ruled Monday that the ship could anchor near Alang, the hub of India's shipbreaking industry.
It said the ship owners would have to pay for disposal of any toxic substances found during its dismantling.
The ship, now known as the Oriental Nicety, entered Indian waters in May. It was denied permission to anchor at Alang after an environmental activist petitioned the top court, saying it contained toxic substances.
In 1989, millions of gallons of crude oil spewed into Alaska's ecologically sensitive Prince William Sound when the Exxon Valdez dashed against rocks, causing incalculable environmental damage.