With chakra, the user connects an eye made of sand or Gold Dust to their optic nerve, which enables them to know what happens in the artificial eye's field of vision, this is genuinely a third eye for its user. The user can control the size of the eye depending on its use. Its main purpose is spying, since it can form and disperse in any location on command. Gaara also uses it when he completely surrounds himself with his Shield of Sand so he can see what's happening outside of the protective dome. In order to activate it however, the user must close one of their eyes.
In Buddhism and Hinduism, the third eye is considered to be the eye of knowledge and symbolises enlightenment, some deities being depicted with it.