According to PayPal India:
"In line with the Govt of India's Gazette Notification pertaining to Subsidizing MDR charges on Debit Cards/ BHIM UPI/ AePS transactions of value less than or equal to INR 2000 dated 27th Dec 2017, we are announcing a promotional pricing of 2.5%+ INR 3 up-to 1 January 2020 for all domestic payments."
UPDATE: On 5th Feb 2021, PayPal announced that it will stop offering domestic payment services in India effective 1st April 2021.
This morning PayPal India announced that Indian PayPal users can accept payments in INR for domestic transactions.
To enable INR payments in your PayPal account you will need tologin to your PayPal Business account and complete a domestic KYC process at this link.
We have updated the payMyPage (pMP) system to allow you to accept PayPal payments in INR and have already taken care of the technical part of enabling the display of the PayPal INR payment option to visitors from India.
However, this option will only work if you have successfully completed domestic KYC with PayPal. You can activate this feature by checking the box in your PayPal module settings after logging-in on this page.
Once this is done, if your payment page has a price mentioned in INR then PayPal will appear as a payment option for INR payments.