Thanks to all who have shared their ideas and needs on this thread and particularly to @Raghu_Mittal for the initial feature description.
ODK Collect v1.23 beta 1 was just released and includes a beta implementation of the feature. Please help us improve it by trying it! You can join the beta as described in this post and there is a test form available from the default https://opendatakit.appspot.com server. This form will collect your location in the background and ask you about the properties of your location (indoors, city, etc).
As @Raghu_Mittal described, there are tradeoffs between location accuracy and battery consumption to consider. The current implementation leverages Android's fused location provider to balance the two. For each point that is collected, there is a 20 second timeout period. The data you collect with the sample form will guide whether changes need to be made to those decisions.
It is possible to collect background location not only when a form is opened but also when a particular value in the form changes. XLSForm support is not yet available but will be soon (see XLSForm spec proposal: auto-location type for background location capture with setlocation action - #3 by LN).