It is strange that being considered an IT superpower-wannabe, we are lagging on the research front, to say the least. Good people go abroad or take up jobs in a variety of areas. However things have changed slowly but surely in the last few years. The IITs (IISc included by default) have explicitly put research on their agenda in the last few years as compared to the traditional education objective. Other great places in India include TIFR, BARC, ISI, CMI etc. but that is off-topic. In the late 90s, the CS department of IIT Bombay had a handful of PhD students. Today, along with the relatively new School of IT, there are more than 50 PhD students on roll. I hear similar stories about the other IITs. This is not an overnight change; the numbers of quality students as well as institutes can only grow slowly.
This is neither a PhD rant nor rave, nor is it meant to give advise. What follows is the fact based procedure of the entire PhD process at a top school, with IIT Bombay as the example. Things will vary slightly from place to place.
The binary decision:
The most important thing is to make the binary decision about whether or not to do a PhD. Your reasons will be your own, so will your balances and trade-offs. There is tons of advice and anecdotes available for reading online; ask your friendly neighbourhood PhD person for standard sources.
The most important thing is your advisor. It is best to get into early contact with someone you want to work with. Few people who do not have a rapport with some advisor get admitted. These are usually people who try for a PhD directly after BE/MCA/MCS (all these are considered equal). It is usually easier to find and convince advisors if you have a M.Tech./MS degree and some existing collaboration and research track record. Contact via the company you work for can also work. Next, apply - this is possible all year round. Written tests and interviews are conducted twice a year. An admissions panel of Profs. will select you based on multiple factors.
An external PhD: There is an interesting concept of an external PhD at IITB. You spend upto an year doing courses at IITB. After that you return to your company or college (if you are a teacher). The rest of your PhD is done remotely. You need to have an advisor in IITB. You need to have a co-advisor at your home company/college. You need to specify this before admission. Some administrative rules differ. This usually takes longer and is not the same fun as staying full time on campus but opinion and constraints differ.
Try to find a well-funded advisor/dept. If you have worked, you will feel the pinch. Be ready for a poor life. If you manage to get an assistantship, the pay is about 9-10k per month. There are some fellowships like the Infosys and IBM fellowships who pay more and include travel grants. Living as a student is of course cheap on campus. There are married people here too. The need to worry about funding will arise particularly if you need to travel for international conferences or something. Travel as a student is a different subject altogether.
You will start year number n=1 by doing courses. The number of courses varies from 2-8 (or more) depending on your previous qualification and advisor. If you don't have a Masters degree, you essentially have to play catch up. You spend n=1 and n=2 trying to figure out what the hell is going on and how you can make a noise. This is the problem finding phase. You will usually work on a couple of different problems, get your hands dirty, possibly publish 1-2 papers depending on what work you do. This is usually when you develop the habit of reading many research papers and books. You will discover cack sessions. You will feel alone and wish you had technical peers. Look to find peers and cultivate collaborations.
You will have settled into some area of work in n=3. You will spend n=3 and at least part of n=4 working working working. You will typically do one or more conferences and papers here. You will be a master of handling the PhD blues by now.
n=4 or n=5 will be when you will start worrying about finishing. "How and when to finish?" and "What to do next?" are questions that will take up a lot of your time. One fine day your advisor will say, "Enough! Write your thesis and get out now". In terms of evaluation, you have to present your work at the end of every year n=1,2,3,...,k. This is an annual progress seminar (APS) where your research progress committee (RPC), a bunch of professors, evaluate whethere you can continue with your work. The last APS is a pre-synopsis where you present your entire thesis. The pre-synopsis is like an internal defense. Once you clear this you can submit your thesis and get out.
Thesis and Defense:
The most gruelling part of your PhD will be writing your thesis. You will wish you had done some things differently :). You will write, write, and re-write things over and over and over again. How much ever you wish otherwise, this takes time, a few months at least. Once you submit your thesis, you can start working. You unofficially are a PhD now. Your thesis will actually go to one Indian and one Foreign examiner for review. After their comments come in a few months later, you formally defend your thesis. You are definitely working for many months by the time this happens. It is wrong to say the final defense is a formality. It is very serious but you wouldn't have got to this stage if you hadn't already internally defended. The pre-synopsis and defense is when you really understand what it is to defend a thesis. I feel this process the most long winded compared to many universities abroad.
Well, the world is waiting. You look for jobs in your pre-synopsis or thesis writing stages. There are tons of opportunities, including in India. I can't say things were this rosy 5 years ago. Now a whole bunch of pure research and R&D labs have opened up. As an example, specific PhD hiring is happening at research labs of Microsoft, Siemens, IBM, HP, Bell, in addition to a bunch of relatively newer companies Google, Yahoo, Amazon, and literally tons of start-ups. Then there are a whole bunch of academic positions - at the various IITs, various great institutes and colleges across India specific to many disciplines.
The intention here was to outline the general process which is not clear to many people. Specifics vary quite a lot; you will be best off talking to multiple people before deciding anything. Leave a question here if you want.
Others please chip in with your advise, comments, experiences.