Decision when to create Index on table column in database?

Don't create Indexes in every column! It will slow things down on insert/delete/update operations.

As a simple reminder, you can create an index in columns that are common in WHERE, ORDER BY and GROUP BY clauses. You may consider adding an index in colums that are used to relate other tables (through a JOIN, for example)

Example:

SELECT col1,col2,col3 FROM my_table WHERE col2=1

Here, creating an index on col2 would help this query a lot.

Also, consider index selectivity. Simply put, create index on values that has a "big domain", i.e. Ids, names, etc. Don't create them on Male/Female columns.

but update of column value wont have any impact on index value. Right?

No. Updating an indexed column will have an impact. The Oracle 11g performance manual states that:

UPDATE statements that modify indexed columns and INSERT and DELETE statements that modify indexed tables take longer than if there were no index. Such SQL statements must modify data in indexes and data in tables. They also create additional undo and redo.

So bottom line is when my column is used in join between two tables we should consider creating index on column used in join but all other columns can be skipped because if we create index on them it will involve extra cost of updating index value when new value is inserted in column. Right?

Not just Inserts but any other Data Manipulation Language statement.

Consider this scenario . . . Will index help here?

With regards to this last paragraph, why not build some test cases with representative data volumes so that you prove or disprove your assumptions about which columns you should index?

In the specific scenario you give, there is no WHERE clause, so a table scan is going to be used or the index scan will be used, but you're only dropping one column, so the performance might not be that different. In the second scenario, the index shouldn't be used, since it isn't covering and there is no WHERE clause. If there were a WHERE clause, the index could allow the filtering to reduce the number of rows which need to be looked up to get the missing column.

Oracle has a number of different tables, including heap or index organized tables.

If an index is covering, it is more likely to be used, especially when selective. But note that an index organized table is not better than a covering index on a heap when there are constraints in the WHERE clause and far fewer columns in the covering index than in the base table.

Creating indexes with more columns than are actually used only helps if they are more likely to make the index covering, but adding all the columns would be similar to an index organized table. Note that Oracle does not have the equivalent of SQL Server's INCLUDE (COLUMN) which can be used to make indexes more covering (it's effectively making an additional clustered index of only a subset of the columns - useful if you want an index to be unique but also add some data which you don't want to be considered in the uniqueness but helps to make it covering for more queries)

You need to look at your plans and then determine if indexes will help things. And then look at the plans afterwards to see if they made a difference.