Earlier, the Netherlands beat reigning Olympic champions Germany 2-1 in another last eight match to set up a semi-final clash against reigning world champions Australia.
India will now play the World No.1 Germans in a 5-8 position classification playoff Friday.
The first 23 minutes completely belonged to World No.10 India who surprised the Kookaburras by scoring two goals in that period.
The hosts took off well by scoring the first goal of the match in the sixth minute when S.V. Sunil’s pass into the striking circle was well connected by Birendra Lakra who put it past Aussie goalkeeper George Bazeley.
The Kookaburras retorted with a penalty corner in the 10th minute but P.R. Sreejesh in the Indian goal made a brilliant save to maintain the scoreline.
In the next minute, Yuvraj Walmiki’s touch put the ball inside the Australian goal to send the 8,000-strong crowd berserk as the hosts led 2-0.
Both the sides played high intensity attacking hockey for the next 13 minutes but the visitors clawed back with a 24th minute penalty corner conversion via Nicholas Budgeon. Five minutes later, Jason Wilson silenced the crowd with his field goal, equalising the scoreline.
The four-time Commonwealth Games champions took the lead for the first time in the match at the stroke of halftime through Glenn Turner.
Australia continued their goal streak in the second half with Russel Ford (41st minute), Simon Orchard (45th) and again Ford (47th), putting the game completely out of India’s reach.
India took their chances and attacked from both wings but the Australian defence proved to be too strong for the Indian forwards to breach.
Walmiki had another chance in the middle of second half when he found an open Australian striking circle. The youngster found no one to pass to and went straight for the goal but was stopped by Bazeley.
The hosts earned two back-to-back penalty corners in the 61st minute but Amit Rohidas failed to convert both.
Jacob Whetton added salt to India’s wounds when he put the ball past Sreejesh via a field goal in the 65th minute and the visitors maintained the 7-2 scoreline till the end.