Before you get any other lens, get the 50mm f/1.8. Its a must-have lens for anyone even remotely interested in portrait photography. You just can't go wrong with it. Actually I never used the 18-55 after I got my fifty prime.

For your zoom needs, you would be better off with a third party lens like the the Tamron 17-50 f/2.8 (non-VC). At INR 21,000 ($440) it costs a third of the Canon 17-55mm f/2.8, and has great overall performance.

Here is my story:

I had a similar dilemma a while back. I had a Canon 500D with the 18-55 kit lens and was looking for a new lens. Since my budget was tight I purchased the 50mm f/1.8 and I was blown away by what a difference the wider aperture made. Amazing low light performance and sweet looking bokeh made it difficult to take a bad shot with it.

But with a crop factor of 1.6, I found it a little too tight for indoor use and while 'zooming with your feet' is the norm with a prime lens, I found myself running out of space indoors.

Also I used to shoot a lot wide open and found that shooting a portrait at f/1.8, even getting both eyes in focus becomes a challenge. Get a second person in the frame and there is no way you can get both people in focus. So I started stopping it down to about f/2.8 which gave me workable DOF while still giving great low light performance.

This made me realize that I needed a lens with the versatility of the kit lens and the wide aperture like the prime. I was on a tighter budget and hence purchased the Tamron 17-50 f/2.8 (non-VC). I have not been disappointed since. I still turn to the 50mm f/1.8 when I really need the extra 2/3rd stop or really shallow DOF, but the Tamron is what I use 95% of the times.

I've shot portraits, concerts, weddings and its always performed well. It would be better if it were a little sharper wide open and if the autofocus wasn't as loud, but its overall performance and versatility trump these minor issues.

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PS: I'm a huge fan of bokeh and shoot mostly in low light, so I thought it would be useful to show some examples of what f/2.8 lets you do.

This one shows how you can use the shallow DOF at f/2.8 to get sweet bokeh. The 50 prime would have also done wonders here, but you can't keep switching lenses at an event.

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This one was shot with just a candle to the left (out of the frame) and the lighter (in the frame).