Paras, which clocked sales of more than 4 billion rupees (about 56m) in the financial year ended March, makes over-the-counter medications, including Moov pain relief ointment, Krack heel care lotion and D'Cold cold remedy.
The company also makes prickly heat treatment Dermicool and Itch Guard and Ring Guard fungal creams along with hair gel products and deodorant brand Set Wet.
RK Gupta, managing director at Taurus Asset Management in New Delhi, said: "The research base of companies and the market potential in India are the main attractions for foreign players in the Indian healthcare sector. We will see these kind of deals in the future as well as global drug makers stepping up their efforts to capture a bigger share of the emerging markets."
Private equity firm Actis will sell its 63 per cent stake in Paras to Reckitt. Other shareholders, including Sequoia Capital and Paras founder Girish Patel and his family, will also sell their stakes to the UK company.
Reckitt, led by chief executive Bart Becht, has been investing in the non-prescription pharmaceuticals sector over the past four years, buying Boots' over-the-counter business in 2006 for 1.9 billion, US-based Adams cough medicines company in 2008 for $2.3bn (about 1.5bn) and earlier this year the SSL Durex condoms group for 2.5bn.
Analyst Damian McNeela, at brokerage Panmure Gordon, called the price of the latest deal "comparatively high" at 8.2 times revenues and 30.7 times Ebitda (earnings before interest, tax, depreciation and amortisation).
In its third-quarter earnings, Reckitt saw rapid growth in emerging markets and from its pharmaceuticals business, which helped to counter the impact of sluggish European and North American sales and tough competition from its key rivals in Europe.
Sector information provider IMS forecasts 17 key emerging markets will account for about 50 per cent of global growth in pharmaceutical sales worldwide over the next five years.
Abbott Laboratories paid a hefty $3.7bn (2.3bn) in May for the branded generic drugs operations of India's Piramal Healthcare.
In October, an Indian newspaper reported that GlaxoSmithKline, Sanofi-Aventis, Novartis and US-based Johnson & Johnson had submitted concrete bids to acquire a majority stake in Paras. Japan's Taisho Pharmaceutical had also been expected to join the race.
Reckitt was advised by JPMorgan on the deal.Morgan Stanley advised Actis and other Paras shareholders.
The number of deals by private equity firms is rapidly rising in India, with firms such as 3i Group and Blackstone Group scouting for new investment opportunities, and many others selling their holdings as valuations improve.
The total value of private equity-related mergers and acquisitions activity in India has risen to $5bn (3.1bn) so far this year, up from $2.7bn (1.7bn) a year ago, according to data group Thomson Reuters.
Private equity firms typically make minority investments in India, where entrepreneurs are often reluctant to sell out and where full buyouts are rare.