However, the controversial business tycoon was immediately let out on bail - the second time he secured his release after an arrest in London ever since he fled India.
Mallya had earlier been arrested in London in April based on an extradition warrant, but was later granted bail and released on a bond of 650000 pounds.
In a repeat of development that happened six months ago, liquor baron Vijay Mallya was granted bail, after three hours of his arrest under United Kingdom procedure.
I have not eluded any court.
Speaking to PTI outside the court room, Mallya said that has done nothing wrong and described the allegations against him as fabricated. "The government alleges that some may have ended up in Force India Formula 1", he added, when asked for further details by the Chief Magistrate Emma Arbuthnot.
The Indian investigation agencies had invoked India's Prevention of Money Laundering Act in alleging that Mallya had diverted huge bank loans to tax havens.
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CBI questioned Mallya in December 2015.
Liquor baron Vijay Mallya was arrested on Tuesday in London in a case of money laundering.
This is followed by an extradition hearing following which the final decision is taken by the Secretary of State.
Banks had previously shot down Mallya's offer of Rs 6,868 crore in April 2016 to settle the dues. The money laundering charge and the evidence in support has been joined to the original fraud charges.
The ED then requested the Passport Authority in New Delhi to revoke Mallya's Indian Passport, so as to compel him to join the investigation. Mallya, is already out on bail on an extradition warrant executed by the Metropolitan Police of London earlier this year.
An extradition request was sent in February to Britain requesting the businessman to face trial after he left India on 2 March 2016.