New York-listed Alibaba is looking at a "significant stake" in the Indian smartphone maker though the size of the deal is not clear, according to the source.
Alibaba and Micromax both declined to comment when contacted by CNBC.
Negotiations between the two are still ongoing but a stake in Micromax would give Alibaba access to India's rapidly growing smartphone market.
Micromax has an 18 percent smartphone market share in India, according to market research company IDC, and has built its user base on selling high-spec budget devices. Micromax chairman Sanjay Kapoor told CNBC this year that the company produces "close to 25, 30 phones in a year" in different segments to broaden its appeal.
Alibaba has its own operating system, known as YunOS, which it is looking to grow in order to push its e-commerce services. By partnering with Micromax, Alibaba could have its operating system installed on Micromax devices in order to get a stronger foothold in India's e-commerce market which is dominated by domestic players Flipkart and Snapdeal.
Alibaba has been pushing its mobile operating system in the past few months. In February, the technology giant invested $590 million into a tiny domestic smartphone player called Meizu. Last month, Alibaba partnered with state-backed China Telecom to sell budget smartphones in the country's small cities and rural areas, in a further bid to boost its presence in untapped parts of the country.