While the companies declined to offer details about the deal, multiple sources said Paytm has invested $25 million (over Rs. 161.45 crores) and will hold 51 percent stake in the joint entity.
The sources added that founders of Little - Manish Chopra and Satish Mani - will exit following the merger.
The entities are expected to clock cumulative revenues of under $100 million by March, 2018, they said.
The sources did not wish to be identified as the deal is private. Paytm, which was an investor in Little, declined to comment on the matter.
In a statement issued today, Paytm said: "Paytm's strategic holding in Nearbuy-Little will provide our merchant partners an opportunity to offer deals to acquire new customers and grow their business".
It added that the deal will create India's largest discovery and deals platform for local merchants.
Also, existing shareholders of Nearbuy, including Sequoia India, will also become shareholders of the merged entity that will work with over 40,000 merchants across categories like food, beauty and travel.
Besides, Paytm will also showcase a large number of these deals on its platforms for consumers at a later stage.
"This combination of Nearbuy and Little marks a great opportunity for us to reinforce our commitment to support small and large retailers in the new age of mobile commerce and Payments," Paytm founder and CEO Vijay Shekhar Sharma said.
Paytm has been actively investing in various companies to beef up its online services offerings. In July, it had acquired stake in online ticketing and events platform Insider.in.
Formerly part of Groupon, Nearbuy parted from the parent in 2015. It was rebranded as Nearbuy after the promoters of the Indian arm and private equity investor Sequoia pumped in funds.
Speaking to PTI, Nearbuy chief executive Ankur Warikoo said Little Internet and Nearbuy combined will own 88 per cent of the market share.
"By end of 2018, we plan to be working with 100,000 merchants... There are around half-a-million merchants in the organised retail space, which we would like to bring on our platform," he added.
Disclosure: Paytm's parent company One97 is an investor in NDTV's Gadgets 360.PaytmPicksMajorityStakeNearby-LittleCombine