Human Rights Watch said pupils from marginalised communities often dropped out of school and started working as labourers rather than face continued humiliation at the hands of teachers and principals.
The 77-page study on schools was compiled through interviews with more than 160 teachers, principals, parents and students in four states which have large populations of low-caste poor, indigenous tribals and Muslims.
"India's immense project to educate all its children risks falling victim to deeply rooted discrimination by teachers and other school staff against the poor and marginalised," said the report's author Jayshree Bajoria.
"Instead of encouraging children from at-risk communities who are often the first in their families to ever step inside a classroom, teachers often neglect or even mistreat them," she said.
Children from Muslim communities were among those often made to sit at the back of classrooms or in separate rooms. They were called derogatory names, were denied leadership roles and were served food last, the report said.
The report comes as a mammoth general election is underway which is likely to vault Narendra Modi and BJP to power after a decade of Congress party rule.
Some children said they were segregated and neglected because they were considered dirty, while Muslim students said they were called "mullahs", a term for an Islamic cleric, instead of by their names.
India's Parliament passed landmark legislation in 2009 that guarantees state schooling for children aged six to 14 and enrolments have reached more than 90 percent nationally.
But HRW said the law does not contain punishments for those who discriminate in the classroom.
Most education authorities have failed to establish proper mechanisms to monitor and track children, who were at risk of dropping out, and acting to ensure they were able to remain in school, the report said.
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