Helen, both can be natural. Whether either is correct depends on the context. As a teacher one of the most important things you need to teach your pupils is "context". You have to teach the that the two are used in, and imply, two different situations. The ability to understand and distinguish "context" is essential to good writing and good comprehension. So be strict and do not just let any muddle or confusion pass uncorrected. "What color is this?" You can only say this when you have the object in your hands or when it is near and you are pointing at it. If a child says, "My father bought a new car", you have to teach him or his friends say, "What color is is it?" "What color is this?" is not correct unless the car is approaching or right in front of you. Don't let your pupils muddle through. Teach them to be correct.

You would use "this" to add emphasis, perhaps when you are pointing to something next to you or in your hands. If you are just referring to an object which is already known by the listener, you can use the pronoun "it" for the object.

Yes, It's natural, I use it a lot ;)

Both are perfectly natural. You would only say "what color is this?" about something that's nearby and visible. It is an unusual question to ask because usually we would know. Someone is looking at an object and doesn't know the name of the color. Someone looking at clothing in a store might ask "What color is this? Would you say this is 'blue' or 'navy?'" Someone might say "I'm color blind, can you tell me: what color is this, green or brown?" You would say "what color is it?" about something that is not visible. "I just bought a new shirt." "Oh, what color is it?"