Gourmangi Singh's last-gasp goal in the second half of extra-time sent India to the final of the SAFF Championship.
The defending champions huffed and puffed before scraping past a spirited Bhutan 2-1 in Male, Maldives, on Wednesday.
After regulation time ended in a 1-1 stalemate, a penalty shoot-out looked the only way out to resolve the impasse, but Gourmangi's curling shot found the net and sealed India's passage to the final.
In Saturday's final, in Colombo, four-time champions India will meet the Maldives.at the Sugathadasa Stadium in Colombo.
A 70th minute strike by Ibrahim Fazeel helped Maldives pip Sri Lanka in second semi-final under lights in Colombo on Wednesday night.
Bhutan took the lead in the 18th minute through the talismanic Kinley Dorji before India equalised in the 30th minute through Sunil Chetri.
In the previous match, too, Gourmangi had scored the all-important goal as India beat Maldives 1-0.
India's profligate forwards, including captain Baichung Bhutia, either lost the plot once they entered the rival box or squandered opportunities that came their way.
Throughout the match, Bob Houghton's wards were stretched by their unfancied opponents and the coach must have heaved a huge sigh of relief with the late winning goal.
India could have gone ahead inside six minutes but Bhutia's header ricocheted off the vertical bar and then Chetri's powerful shot from outside the box had Bhutan custodian Jingme Singey fumbling before gathering the ball with his second attempt.
The match turned out to be a nightmare for India's N P Pradeep, who missed umpteen chances.
Bhutan grabbed the lead with Dorji's 18th minute strike -- even though it came against the run of the play -- when he capitalised on a defensive lapse.
Chetri, however, brought smiles back in the Indian camp when he received a Pradeep pass and had all the time at his disposal to slot it home in the 30th minute.
After the breather, Pradeep's header, off a Steven Dias corner, was saved on the goalline, while Bhutia's effort from a narrow angle was just off target.
The slipshod show continued in extra-time as well. A Pradeep pile driver was fisted away by the Bhutan goalkeeper, while Climax Lawrence twice found himself in a perfect position inside the box but, on both occasions, shot wide.
The tie-breaker looked imminent, and sensing that Bhutan even replaced their custodian. However, India won a free-kick in the last few minutes of the second period of extra-time and the ball traveled to Pradeep inside the box. The Indian striker made a mess of the shot and the ball luckily fell on the feet of Gourmangi, who took a half turn and unleashed a curling shot that beat the goalkeeper all ends up.