He was received by Prime Minister Tshering Tobgay at the Paro airport and was given a ceremonial guard of honour.
The focus of talks between the two nations is expected to be over trade and hybrid electricty.
He will meet Bhutan King Jigme Khesar Namgyel Wangchuck and also hold talks with his Bhutanese counterpart Tshering Tobgay, today.
He is accompanied by the External Affairs Minister Sushma Swaraj, National Security Advisor (NSA) Ajit Doval and Foreign Secretary Sujatha Singh and a delegation of eight journalists.
On Monday, he will also address the joint session of the Parliament of Bhutan. He will also inaugurate one of India's assistance projects -- the building of the Supreme Court of Bhutan.
The fact that the Prime Minister chose Bhutan as his first foreign destination assumes significance since China has lately intensified efforts to woo it and establish full- fledged diplomatic ties with Thimphu.
Ahead of his visit, Modi said Bhutan was a "natural choice" as his first foreign destination because of the "unique and special relationship".
In his pre-departure statement, Modi said relations with Bhutan will be a key foreign policy priority of his government.
"I am looking forward to my first-ever visit to Bhutan and to nurturing and further strengthening India's special relations with Bhutan," said Modi before undertaking the trip at the invitation of Bhutan's King and the Prime Minister.
"Our relations with Bhutan are unique and especially warm. Our historical and cultural linkages make us natural friends and partners," Foreign Secretary Singh told a press conference in Delhi.
"Bhutan is one of our most important strategic partners ....It is a very good country to show our policy of good neighbourliness in South Asia and special token of our friendship," she said explaining why Bhutan was chosen as the first foreign destination of Modi.
(With agency inputs)