I'm working in the USA on a H1B visa and am currently in India on vacation. On my flight back to the US, I want to visit Paris for a couple of days. Is it possible for me to apply for the Schengen VISA from the consulate in India, which is my country of citizenship. I've been working in the US for over 2 years now.
You should be able to apply in India. See the FAQ here: http://eeas.europa.eu/delegations/india/more_info/faq/schengen_visa_en.htm#faq5
However you may have to explain to the embassy you are applying to about the reason you are applying from India rather than the USA where you currently reside.
No, in principle you should apply at your place of residence. In practice, many consulates might accept applications from citizens without asking for any other evidence that you are in fact a resident or or make an exception depending on your circumstances but technically that's the rule.