He was arrested by the Metropolitan Police's extradition unit "on behalf of the Indian authorities in relation to accusations of fraud".
India has been pushing for the extradition of Mr Mallya, who faces charges of financial irregularities at his defunct Kingfisher Airlines.
Mr Mallya also has cricket and motor racing interests. He is said to owe banks £600m but denies wrongdoing.
He is due to appear at Westminster Magistrates' Court later on Tuesday.
The businessman made his fortune selling beer under the Kingfisher brand before branching out into aviation and Formula 1 racing. He also owns an Indian Premier League cricket franchise.
However, Mr Mallya's airline was grounded in 2012 and its flying permit lapsed the following year.
It had made annual losses for five years in a row and finally collapsed after lenders refused to give fresh loans.
In March last year, Mr Mallya was blocked from receiving $75m severance pay from British drinks giant Diageo.
He was due to receive the money after being ousted from the firm, but a consortium of banks and creditors had demanded the money should be used to settle some of Mr Mallya's outstanding debt to them.
In April last year, India revoked Mr Mallya's passport. The following month, it began seeking his extradition from the UK.