Which would be the best diesel sedan under 7 lakhs?

The on-road price of the Linea 1.3 MJD Active will be around Rs 8 lakh. It is not a bad car if you can afford to pay 8 lakhs but Fiat/Tata after sales network is not good and Fiat cars have inconsistent build quality and hence niggling problems are common with these cars. For your budget, your options are these sedans:
Maruti Dzire
Tata Manza
Tata Indigo CS
Mahindra Verito
Toyota Etios.

All these sedans will give you more or less similar fuel efficiency. Test drive each car and see which one suits your needs better. Avoid the Indigo CS as the other cars mentioned along with it are newer and better designs.

I agree with what Dinkar says and would suggest you to go with Tata Manza, and as of now it comes with some festival discount and makes a decent buy. I would also look at Verito as another option.

I forgot to add couple of options more Ford all new Fiesta (the 2011 version) or the Ford Fiesta Classic. With an irresistible price of 5.5 lakhs (for base version) the Ford Classic starting it is another sedan worth considering. Best wishes....