A document released on Monday showed March 17 as the deadline for submission of initial expressions of interest, and that any bidder must assume liabilities, including debt of 232.87 billion rupees ($3.28 billion).
Substantial ownership and effective control of the airline must remain with an Indian entity, the government added.
The potential sale of an airline kept aloft by a $4.2 billion 10-year bailout in 2012 comes as the government divests money-losing assets to manage the fiscal deficit.
The latest offer should garner significant response partly because it involves a clean exit by the government, said CAPA aviation consultancy India head Kapil Kaul.
"As the entire debt excluding aircraft debt is taken out of the deal, it signals a very determined effort to exit Air India, to allow taxpayers' funds be utilized for the government's social agenda," said Kaul.
Indian business house Hinduja Group and US-based fund Interups have expressed interest in buying the airline, the Business Standard daily said.
It quoted Laxmi Prasad, the chairman and chief business architect of Interups, as saying the fund had initiated talks with the government and would like to make a case for certain aspects of the airline's business to be included in the deal.
The government in 2018 https://www.reuters.com/article/us-air-india-divestment/air-india-sale-gets-no-bid-exposes-hurdles-for-modis-divestment-drive-idUSKCN1IW1HP tried to sell 76% of Air India and offload about $5.1 billion of its debt, with terms including the retention of all employees.
InterGlobe Aviation Ltd's IndiGo and Jet Airways Ltd - which has since collapsed - initially showed interest, but opted out after the terms were disclosed.
Steel-to-autos conglomerate Tata Group, widely viewed as a potential suitor for Air India, also decided not to bid after deeming the terms too onerous, sources told Reuters at the time.
On Monday, civil aviation minister Hardeep Singh Puri said the government was open to suggestions and altering some provisions if the changes helped to find a buyer.
"We have gone into this exercise, months of planning and preparation have gone into it and this is not the final, final. The bidders are going to get 45 days, they are going to come back to us. It is an interactive process," Puri told reporters.
"We are open to revising, refining and tweaking our views."
A successful bidder would win control of Air India's 4,400 domestic and 1,800 international landing and parking slots at domestic airports, as well as 900 slots at airports overseas.
It would also get 100% of low-cost arm Air India Express and 50% of AISATS, which provides cargo and ground handling services at major Indian airports, the bid document showed.
The buyer would also have to provide 3% of the value of the airline's equity as stock options for permanent employees.
Air India has about 9,400 permanent employees and 3,600 fixed-term contract staff - including 1,850 pilots and 4,600 cabin crew - with benefits such as discounted air tickets and pensions.
Its employees protested against the 2018 sale attempt, and it was not immediately clear if they would also resist the latest effort. The government said it would provide details on safeguarding employee interests in its final bid document.
A spokesman for the employee union did not have immediate comment.
The government's divestment plan could also face opposition from within, with Subramanian Swamy, an MP from the ruling Bharatiya Janata Party (BJP), threatening legal action against the sale.
"This deal is wholly anti-national and I will (be) forced to go to court. We cannot sell our family silver," Swamy said on Twitter.
(Reporting by Aditi Shah and Aftab Ahmed; Writing by Euan Rocha; Editing by Christopher Cushing and Clarence Fernandez)
By Aftab Ahmed and Aditi Shah