Update 2: I really hope this agent is wrong in what they wrote :

The email from Paypal says that the banning of personal payments to and from India is a permanent change. Please read the Paypal email below regarding the banning of personal payments.

Thank you for contacting PayPal.I sincerely apologize for the inconvenience, but the system did recognize that it was a personal type of payment processed in your account. It also shows that there’s no shipping address provided to you,and that’s one factor to consider if it’s a personal payment or not.

This change will be permanent in PayPal, and personal payments will no longer be allowed to be sent TO or FROM India. The personal payment option in the checkout page will no longer be available to India customers, but you can still continue to use other payment options, such as eBay checkout.

We hope you understand our situation and thank you for your patience. We’re available to answer any questions you might have. Just give us a call at 1-402-935-2080 and we will try our best to give you immediate answers. We appreciate your business.

Update: Techcrunch is the 1st major blog to catch it

‘If you are a Paypal user having your country selected as India and have gotten any payment from Paypal, it will be reversed if its marked as a personal payment. There has not been any clarification from Paypal in this regard , only emails detailing that the transaction is reversed causing a lot of problems to the account holders.

They claim that they are working on correcting this though. Here is the message I received :

Hello ABC,

Your payment of  $$$ has been sent back to the sender of the payment. 

We reversed this payment because we have stopped allowing personal payments to be sent to or from India.

If this was a payment for a purchase of goods or services, and not a personal payment, then you may contact the buyer and have him or her resend the payment as follows:  (a) click the Send Money tab, (b) select "Goods," and (c) provide a shipping address.

If this payment was a personal payment such as a gift, then we have requested that the sender find another payment method until we restore personal payments to and from India.

We are trying to resolve this issue as quickly as possible and we’re sorry for
any inconvenience.

Thank you,