Upon reading many wordpress forums, finally got a solution.
Simply follow the below steps to solve this,
1. Create a custom php.ini file in public_html folder.
2. Add the following lines in php.ini file:
upload_max_filesize = 16M
upload_tmp_dir = on
upload_tmp_dir = /home/username/tmp
Please make sure to replace username with your hosting username
3. Copy the same php.ini file to your wp_admin folder.