Australia spin spearhead Nathan Lyon claimed eight for 64 on a turning wicket to put the tourists on the verge of victory inside three days in the third Test against India on Thursday.

A winning target of 76 may sound a cakewalk but Australia will have to score those runs on a track where 30 wickets have tumbled on the first two days of the spin-dominated contest.

India have retained the Border-Gavaskar Trophy with a 2-0 lead in the four-Test series but a victory tomorrow would secure Australia's place in the final of the World Test Championship in June.

India have been on the back foot in the match since being skittled out for 109 in their first innings and they did marginally better in the second when they were all out for 163 when stumps were drawn.

Only Cheteshwar Pujara (59) put up a brave fight against Australia's three-pronged spin attack led superbly by Lyon.

"It's a difficult pitch to bat on. I hope we'll be able to bowl them out," Pujara told the broadcasters.

"I know it's not enough. Seventy five may look like it's not too many, but still, there is a chance."

The action-packed second day began with Australia resuming on 156-4 and after an hour's lull, it rained wickets at the Holkar Cricket Stadium.

Australia looked in cruise control at 186-4 but once overnight batsmen Cameron Green (21) and Peter Handscomb (19) departed, the wheels then came off their innings.

The tourists lost their last six wickets for 11 runs to fold for 197 with India seamer Umesh Yadav's reverse-swing skills earning him 3-12.

It still left Australia in possession of a sizeable lead of 88 and Lyon wrecked India's top order before the home side could erase their deficit.

The off-spinner removed both the India openers, Shubman Gill and Rohit Sharma, and foiled Ravindra Jadeja's bid to survive by blocking endlessly.

Matt Kuhnemann claimed the prized wicket of Virat Kohli (13) but Pujara mixed caution with calculated aggression to keep India alive.

Shreyas Iyer smacked a six off Kuhnemann to put India in the lead as the low-scoring match changed course again adding another layer of drama.

Iyer unleashed a flurry of boundaries to put the pressure back on Australia but there were more twists to come.

Usman Khawaja, who missed much of the day's action with a sore calf, returned to pluck a stunning catch to end Iyer's run-a-ball 26.

Steve Smith, leading Australia after regular captain Pat Cummins flew home to be with his ailing mother, also held a spectacular one-handed catch at leg slip to end Pujara's stand.

For the second time in his 118 Test appearances, Lyon claimed eight wickets in an innings.