Managing my bookings on Lufthansa.com, I can easily enter and change arbitrary frequent flying numbers, including Air India's Flying Returns. However,

(1) Lufthansa.com may validate frequent flyer numbers online; they certainly do so with M&M. Check whether the Flying Returns number is valid and whether the name fits.
(2) Lufthansa.com may not be able to alter bookings made through a travel agency. The agency should be your first point of contact as it comes to changing booking details, including frequent flyer numbers.
(3) You dan always present your card upon check-in, and the agent will then enter/update details. This will be useful if you turn Gold in the meantime.
(4) Star Alliance Silver does not get you much on Lufthansa; extra luggage may be the most useful benefit.