I have a flight layover of 12 hours at Istanbul. I have a official Indian passport and will have a Schengen visa as I will be returning from Germany.

Do I need a transit visa for city tour?
If yes, what is the procedure?

There is a page on Ministry of Foreign Affairs FAQ that answers your questions specifically:

Question: I will be flying to Europe. I know that our aircraft will land in İstanbul. I am not planning to leave the transit lounge. Do I need to get transit visa?

Answer: If you will not leave the transit lounge at the airport you are not required to have transit visa. Otherwise, you have to make visa application to the nearest Turkish Representation. Contact information of the said missions can be reached through www.mfa.gov.tr (Ministry/Turkish Representations).

Do I need a transit visa for city tour?

Yes, you do need a visa if you are exiting the transit lounge as stated in the previous answer.

If yes, what is the procedure?

You can apply for a visa through a visa application center or you can opt for an e-visa if you hold one of these:

The only major requirement for Indian citizens to apply for an eVisa to Turkey is you must have a valid visa or residence permit from the Schengen, USA, UK or Ireland

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