The group is thought to be behind deadly blasts in the cities of Pune, Bangalore, Hyderabad, Mumbai and Delhi.
Mr Bhatkal, who officials say is a co-founder of the home-grown group, is one of the most wanted men in the country.
Reports say that he was detained close to the border with Nepal.
"Yasin Bhatkal was arrested last Wednesday night in [the northern state of] Bihar," Home Minister Sushil Kumar Shinde told reporters on Thursday morning.
He is in the custody of Bihar police and is being questioned, Mr Shinde said.
Reports say the 30-year-old is being brought to Delhi.
His real name is believed to be Muhammad Ahmad Zarar Siddibappa, but he uses a number of aliases, the authorities say.
Mr Bhatkal was arrested along with an IM colleague who has been identified as Asadullah Akhtar, reports said.
The group was outlawed in 2010 after Indian authorities blamed it for an attack on a German bakery in Pune in which 17 people were killed and 64 people were wounded.
IM is also blamed for three co-ordinated blasts in July 2011 in Mumbai in which 27 people were killed.