The first plane will be sent to the Southeast Asian nation this year, with the remainder scheduled for delivery by 2014.
"This is a proud moment for our country as well as for the Indonesian aerospace industry," said Indonesian Defence Minister Purnomo Yusgiantoro, at the signing of the deal at the Singapore Airshow.
"The C-295 provides the ideal capacity to respond to Indonesia's current and future military and humanitarian transport needs," he added.
The model is a medium-sized transport plane which can be configured for different operational purposes such as ground surveillance, anti-submarine warfare and search and rescue operations.
The planes will be used for "a variety of roles including military, logistical, humanitarian and medical evacuation missions," according to a statement.
Yusgiantoro did not rule out future purchases of the C-295, saying other branches of the armed forces were interested in the plane.
"The police for instance... are also interested in this. And you know that (the) 295 version that we ordered now is for the Air Force, and probably the army is also interested," he said.
The deal includes a collaboration between state-owned aviation firm PT Dirgantara Indonesia (PTDI) and Airbus Military, with Indonesia manufacturing parts for the C-295.
The partnership will allow the Indonesian firm to "grow its aerospace business as a tier-one supplier," said PTDI Chief Executive Budi Santoso.
"This will position PTDI on the global aerospace scene and allow us to enhance our skills and workforce," he added.
Indonesia's defence budget totalled $6.39 billion in 2011, ranking second in Southeast Asia behind Singapore.