The winged shuttle blasted off on a rocket from the southeastern spaceport of Sriharikota at about 7:00am (0130 GMT), with television footage showing it streaming through a clear sky.
The shuttle, about one sixth the size of a normal one, was meant to reach an altitude of 70 kilometres (43 miles) before gliding back down and splashing into the Bay of Bengal 10 minutes later.
"The lift-off was at 7am from the first launch pad here," India's space chief Devi Prasad Karnik told AFP.
"We have successfully accomplished the RLV mission as a technology demonstrator," he said.
The Indian Space Research Organisation (ISRO), known for its low costs, has developed the winged shuttle called the Reusable Launch Vehicle or RLV-TD reportedly on a miniscule budget of one billion rupees ($14 million).
Monday's test mission was a crucial step towards eventually developing a full-scale, reusable shuttle to send up satellites in the future.
India faces stiff competition including from global companies which are developing their own reusable rockets after NASA retired its space shuttle programme in 2011.
Reusable rockets would cut costs and waste in the space industry, which currently loses millions of dollars in jettisoned machinery after each launch.
Billionaire Elon Musk's SpaceX and Amazon owner Jeff Bezos's Blue Origin have already successfully undertaken their own test launches.
But ISRO hopes to develop its own frugal shuttle, as it seeks to cash in on a huge and lucrative demand from other countries to send up their satellites.
ISRO made global headlines in 2013 after it successfully launched an unmanned mission to orbit Mars, spending just $73 million. NASA had spent $671 million on its Maven Mars mission.
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