District magistrate Pramod Chandra Gupta said the upper caste shopkeeper killed the couple in a rage when they asked for more time to pay for the groceries they bought from his shop in Mainpuri, a town in Uttar Pradesh state.
The couple were construction workers and left behind five children, Mr Gupta said.
“The shopkeeper demanded money but they pleaded to be able to pay it later. He became enraged and attacked them with an axe,” Arun Kumar, the investigating officer in Mainpuri district, said.
He added the couple had bought goods from the shop last week with a promise to pay the 60-year-old owner within a few days.
“Their refusal to pay made him angry and he killed them,” Kumar said.
Attacks against Muslims and Dalits have risen since prime minister Narendra Modi’s Hindu-nationalist party came to power two years ago.
Four low-caste Dalit community men were beaten by Hindu hardliners while trying to skin a dead cow in western India earlier this week.
Mr Gupta said the couple’s heads were severed in the attack.
He added: “The shopkeeper panicked after killing the couple and hid in the village. But he was arrested.”
The shopkeeper is from the Brahmin caste.
Formal charges are due to be filed after the police investigation is completed.
Mainpuri is 185 miles south west of Lucknow, the capital of Uttar Pradesh state.
Dalit protests have turned violent in some towns. In western Gujarat state’s Amreli district, a police constable was killed when angry mobs pelted officers with stones.
Although caste discrimination was banned soon after India’s independence from Britain in 1947, the practice persists.
Successive governments have set quotas for jobs and university spots to level out disadvantages faced by lower castes, but it has been difficult to change social attitudes.