I am an Indian with an American citizenship. I will be travelling in India with my family through domestic flights. I am wondering about the ID requirements for Indian domestic flights. Do I need to carry the american passport for ID purposes? Also, will there be issues in buying the tickets online and paying through Indian rupees in this case?
I'm not sure whether the fact that you're Indian yourself has anything to do with it, frankly.
I am an American citizen and have in the past purchased internal flights within India over the internet, paying in Rupees using my credit card issued by an American bank. I flew from USA to the UK and then to India using my American passport. I landed in Hyderabad, where I spent about two weeks on business. I then flew an internal flight from Hyderabad to Bangalore - on leisure, attending a friend's wedding - and back to Hyderabad. A couple of days later, I flew back to England.
On the internal flights, I used my American passport (which naturally had Indian visa to enter the country in the first place) as a proof of identity. Nobody looked at the visa - all they looked at was the photo page in the passport. I flew with Kingfisher Airlines at the time - but I don't think there's any difference, really.
To summarise, I had no problem buying tickets online and flying using my US passport as a proof of identity.
As an American Citizen with Indian Origin I believe you are travelling to India without a Visa with the help of your (and your family members as well) PIO(merged with OCI Card in 2011) or OCI Card. That should be more than enough to embark the flight.
The Indian Embassy lists the OCI Card as a valid Identity Proof for several tasks, even though it doesn't mention domestic flights, it should be sufficient.
For surety I will recommend carrying your passport along though, but I don't believe it will be necessary for domestic travel although it is mandatory while entering or leaving the country alongside your passport (with the lifelong U Visa in it).