He was received by Prime Minister Tshering Tobgay at the Paro airport and was given a ceremonial guard of honour.
He is accompanied by External Affairs Minister Sushma Swaraj, National Security Adviser Ajit Doval and Foreign Secretary Sujatha Singh.
Modi will meet Bhutan's King Jigme Khesar Namgyel Wangchuk and Prime Minister Tobgay during his visit which will see the two sides exploring ways to boost their ties, particularly in trade and hydro-electricity.
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.
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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.
"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.