The 7m scale model was launched from Andhra Pradesh and was expected to fly about 70km (43 miles) into the atmosphere before coming down at sea.
India hopes to launch a full scale re-useable shuttle within the next decade.
There is strong international competition to design re-usable spacecraft after Nasa stopped its Space Shuttle Programme in 2011.
As reported by International media India's Reusable Launch Vehicle (RLV-TD) took off early on Monday morning from the launch site at Sriharikota.
It was not expected to survive the flight but was designed to enable the Indian Space Research Organisation (Isro) to collect important data on hypersonic speed and autonomous landing.
The model was developed over the past five years at a cost of 1bn rupees ($14m; £9.6m).
Reusable spacecraft and rockets enable countries to significantly cut the cost of space exploration.