Bigg Boss Tamil, which airs in Tamil Nadu, told contestants to act as if they were in a mental health facility.
The contestants, in what looked like green hospital scrubs, started clapping their hands wildly and jumping around.
Their display has been criticised as exaggerated, inaccurate and insensitive by experts.
Dr Achal Bhagat, a Delhi-based psychologist, told the BBC that the episode was "outrageous".
"It sustains the stigma that already exists against mental health patients in Indian society," he said. "Widely held perceptions that people who suffer from mental illness have no capacity and are dangerous have to be challenged."
Dr Bhagat said the episode was indicative of a problem not just in the entertainment industry but in society as a whole.
The word "mental" was often used as an insult and assumptions that people with mental health issues were dangerous were widespread. "This urgently needs to change," he said.
Adding to the controversy, one of the contestants, Helen "Oviya" Nelson, who also participated in the episode, left the show soon afterwards, citing mental health issues.
Bigg Boss Tamil, which airs every Saturday and Sunday, is one of the most popular shows in the southern state.
Tamil actor Kamal Haasan who hosts the show, criticised the task and threatened to resign, saying it was "not in good taste".
"I'm actually angry about it," he said in the following episode. "If it happens again, this show is not important to me."
The show's legal consultant, C Rajasekar, told BBC Tamil's Pramila Krishnan that Bigg Boss Tamil follows "norms prescribed by the Information and Broadcasting Ministry".
Asked about the widely-criticised episode, S Shekher, a member of Tamil Nadu's censor board, told BBC Tamil that imitating and mocking those with mental health issues "should have been avoided".
The state censor board however does not have the authority to review entertainment shows produced for television.
However, the Broadcasting Content Complaints Council (BCCC) advises against the use of "humour", "undesirable depiction of persons with disabilities" and "derisive and disparaging" references to their disabilities.
An Indian version of reality show Big Brother has run into trouble after an episode criticised for its depiction of people with mental health issues.