Now Paypal has finally added feature to Indian users to withdraw funds to Indian Bank accounts.
There is no charge to withdraw above INR 7000/- and INR 50/- for less than INR 7000/-
Following are the participating Banks:
State Bank of India , Bank of India, Canara Bank, Union Bank of India, HDFC Bank, ICICI Bank, ING VYSYA Bank, UTI Bank, Standard Chartered Bank, HSBC, Citibank.
As per their FAQ, it should take about 5-7 Business days to receive funds.
For more details, check out Paypal's FAQ Page.