Only Harmanpreet Singh was able to score in the shootout, while S K Uthappa, S V Sunil and Surender Kumar all hit wide off the target. Just four attempts were required from the two teams as Australia had gained a winning 3-1 lead.
Aran Zalewski, Daniel Beale and Simon Orchard scored for Australia, while Trent Mitton's try was blocked by goalkeeper PR Sreejesh.
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There was plenty of drama in the shootout as Beale's shot was re-taken after he failed to score and sought a video review. The video umpire asked the shot to be taken again, leaving Indian coach Roelant Oltmans fuming on the sidelines.
At the end of the match, India protested against the second successful attempt awarded to Beale, delaying the final announcement on the result of the match.
The officials assembled to decide on India's appeal as trophies were removed from the ground and fans also left the stadium.
After discussing the appeal for more than an hour, the jury declared that there was unintentional obstruction on part of Indian goalkeeper P R Sreejesh in the seventh second thus the re-take of the shot was justified.
The presentation ceremony was later held indoors.
Fancied Australia, looking for their 14th Champions Trophy title, faced a stiff fight from the Indians, who were playing their first final, but raised the level to come within striking distance of the title.
Australia wasted a penalty stroke in the second quarter and India failed to capitalise on their superiority in numbers when Australia were down to nine men for a short while in the third quarter.
India made the first foray into the circle in the 9th minute, when Mandeep Singh broke in from the right flank and his shot rebounded off Australian goalkeeper Andrew Charter.
The ball went to Uthappa, who had the opportunity to have a measured crack at the goal, but sent a rushed reverse hit wide to the right.
In the next minute, Australia laid siege on the Indian citadel through four successive penalty corners, but goalkeeper Sreejesh brought off two fine saves. In the end, it was defender Surender Kumar who rushed out to block the penalty corner flick and the ball went out of the circle.
Talwinder Singh exchanged passed with Nikkin Thimmaiah and went into the circle from left, but he got into a very narrow angle and posed no danger as he shot straight into the goalkeeper's pads.
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