In this round, Alibaba is a new investor and will take a 20 percent take though a fresh issue of shares by investing about $680 million, according to the Economic Times, citing two people familiar with the deal.
Paytm runs a mobile wallet, similar to Alipay, as well other services such as mobile phone top-ups and an e-commerce platform. The businesses are similar to those run by Alibaba and the investment will allow Paytm to "achieve scale" and invest in marketing, technology and talent, the company said in a statement.
For Alibaba, the move will allow it to make further in-roads into India's rapidly-growing e-commerce space and digital payment sector, which is a particular focus for many companies as smartphone penetration continues to increase.
"India is an important emerging market with strong e-commerce potential," Daniel Zhang, CEO of Alibaba Group, said in a press release.
"This investment will further expand Alibaba Group's global footprint to India's thriving mobile commerce market."
Last month, Alibaba led a $500 million investment alongside Japan's SoftBank and Taiwan's Foxconn in Indian online marketplace Snapdeal. And on Sunday, chipmaker Qualcomm said it would invest up to $150 million in Indian start-ups, a country where it is already heavily invested.