Watson, who missed the two-Test series against New Zealand early this month due to hamstring and calf injuries, has been in camp with the Australian side during the first Test in Melbourne this week.
'Shane Watson has been released home this morning to continue his rehabilitation program,' a Cricket Australia spokesman was quoted as saying by Australian Associated Press.
'Australia team physio Alex Kountouris will catch up with him in Sydney on 1 January to further assess his progress.
'The squad for the second Test match against India will be announced after this Test match finishes,' he added.
The second Test of the four-match series starts on 3 January at the SCG.
Meanwhile, media reports here said that Watson is in doubt for the entire Test series against India, with the Australian all-rounder and vice-captain still yet to resume batting or bowling in his recovery from hamstring and calf injuries.
And as Watson's prospects nosedived, there was more concern for Australia yesterday when Ed Cowan spent large periods of the second day of the first Test off the field receiving treatment for back soreness. The opener top-scored on debut in Australia's first innings with a thoughtful 68 but was replaced by substitute fielder Dan Christian for much of yesterday's play.
Watson, 30, had appeared in the mix for the Boxing Day Test when he was included in coach Mickey Arthur's three-day batting camp in Melbourne last week.
However, he did not strap on a pad at that gathering and his prospects for the remaining three Tests of the Indian series look dim based on his current progress. Watson continues to work closely with Australian team physiotherapist Alex Kountouris but their sessions have been confined to the MCG gym this week, not the nets.
''He had a gym session today with Alex but he is not batting or bowling yet,'' a Cricket Australia spokesman said. ''He is a work in progress.'
Watson, who has not played in five weeks, spoke at a Cricket Australia corporate lunch at the MCG yesterday, saying it hurt him not to be involved in the Boxing Day Test.
There looks set to be more disappointment ahead with Watson appearing certain to be unavailable for next week's second Test in Sydney and in increasing doubt for the third and fourth matches in Perth and Adelaide.
His recovery from lingering fitness issues - the hamstring he strained in Johannesburg last month, and the calf he subsequently re-injured - has been slower than expected.
Even if he is passed fit to bat at some point in the series, the likelihood of Watson being a bowling option against India decreases by the day. He has admitted that he needs two weeks of bowling in the nets at a minimum to ready himself for a Test match and there has been no suggestion from team officials that he is anywhere near picking up a ball again.