In this study, image processing based low cost indoor localization system was developed. Image processing algorithm was developed in C programming language and Open CV image processing library. Frames were captured by a USB camera which was designed for operating at 850 nm wave length to eliminate environmental disturbances. A narrow band pass filter was integrated to camera in order to detect retro reflective labels only. Retro reflective labels were placed ceiling of indoor area with pre-determined equal spaced grids. Approximate location of mobile robot was obtained by label identity and exact location of mobile robot was obtained with detected label's position at image coordinate system. Developed system was tested on a mobile robot platform and it was observed that system is operating successfully in real time.