Needing to win by a two-goal margin to make the final after Great Britain had edged past New Zealand 3-2 earlier in the day, India failed to produce a cohesive game and suffered their first loss of the tournament.
Finishing with seven points from five matches, India will tomorrow play New Zealand in the play-off for the bronze medal, while the title encounter will be between defending champions Australia and Great Britain.
In the day of the underdogs, World No. 16 Japan pulled off a most stunning upset with a 3-2 victory over reigning world champions Australia, who still remained on course to defend their title by topping the standings roster due to their superior goal difference.
Australia have won the Sultan Azlan Shah Cup nine times, while Great Britain are in the final after 23 years. The Britons won the title in their lone entry into the final in 1994.
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Malaysia made two early forays into the Indian circle, but were thwarted by the defenders. A penalty corner awarded to Malaysia in the ninth minute was reversed after video referral by India.
After a listless first quarter, India managed to earn three penalty corners in the next 15 minutes, but Malaysian goalkeeper Subramaniam Kumar effected two diving deflections.
India's maiden foray into the rival circle was in the 16th minute, which earned them their first penalty corner. The penalty corner flick by Rupinderpal Singh was deflected out by diving goalkeeper Subramaniam Kumar in the 16th minute.
In the second half, Malaysia were awarded their second penalty corner on an appeal for video review.
Indian defenders fell back to thwart a combined Malaysia raid in the 20th minute. Soon after, Talwinder Singh's shy at the other end was saved by the Malaysian custodian.
India showed more purpose in the second half, but their attack was not cohesive and the strikers turned out to be error-prone after reaching the top of the circle.
India's desperation was evident at the start of the last quarter when they took off the goalkeeper and made Harmanpreet Singh the kicker-back.
The goalkeeper was back within a minute when Manpreet Singh was sent off with a green card. But as Manpreet came back in the 47th minute, so did the kicker-back come in.
Going all out in search of goals, India made three forays into the rival circle in the last four minutes and even earned two penalty corners, but the Malaysians stoutly defended their citadel.
Earlier, New Zealander Kane Russell's penalty corner conversion in the 58th minute meant Great Britain only achieved a 3-2 victory. This boosted Great Britain's tally to 10 points.
The Britons surged to a 3-1 lead after field goals by Phil Roper (39th minute) and Mark Gleghorne (49th).
New Zealand took off their goalkeeper to add an extra player upfront and managed to earn a penalty corner in the 58th minute that was converted by Russell.
In another match of the day, Koji Yamasaki's two late goals (56th and 57th minutes) were the feature of Japan's stupendous victory over Australia after Shota Yamada (44th minute) started the fightback with a penalty corner conversion.
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