Australia endured a batting collapse as India closed in on victory in the Boxing Day Test at the MCG.

India's bowlers flexed their muscles after Australia's top order struggled to limp to 133-6 at stumps on day three – a lead of just two runs on Monday.

Australia lost 28-4 in 27.1 overs following tea to be left reeling in Melbourne, where India head into the fourth day needing just four tail-end wickets to win the second Test and level the four-match series.

Joe Burns' woes continued atop the order as Australia's batting fragility was exposed – Matthew Wade (40) and Marnus Labuschagne (28) the pick of the batsmen on a forgettable day.

India returned to the middle 277-5 and leading by 82 runs after capitalising on Australia's poor fielding display on Sunday.

Ajinkya Rahane's memorable innings came to an end on 112 – run out by Tim Paine after Ravindra Jadeja chased a half-century.

Rahane's 112 is the second-highest score by an India captain against Australia at the MCG, after Sachin Tendulkar's 116 in 1999, per Opta. Meanwhile, it is the fifth-highest by any visiting skipper overall.

Jadeja brought up his fifty before he was dismissed by star Australia paceman Mitchell Starc (3-78) and the hosts quickly cleaned up India for 326 as Nathan Lyon (3-72) and Josh Hazlewood (1-47) sent Umesh Yadav (nine), Ravichandran Ashwin (14) and Jasprit Bumrah (0) packing.

India had eyed a lead beyond 200 but instead claimed a 131-run advantage after surrendering 32-5 in 93 deliveries as their tail failed to wag.

In response, Australia crumbled early, especially Burns (four) – who could have been run out twice and faced an lbw appeal before he was caught behind off Yadav (1-5) in the space of just 10 balls amid growing scrutiny.

Yadav limped off injured and just as Wade and Labuschagne navigated Australia through 14 overs and to 38, Ashwin (1-46) drew an edge from the latter, which brought Smith to the crease and the former skipper was bowled around his legs by Bumrah (1-34) for eight.

Wade dug deep in a 137-ball display but his dismissal by Jadeja (2-25) opened the floodgates as Australia went from 98-3 to 99-6 when Travis Head (17) and Paine (one) – controversially out on review – were sent pack to the pavilion.

Cameron Green (17 not out) and Pat Cummins (15 not out) thwarted India but the pair and Australia face an uphill battle entering the penultimate day.