I'm going to address the MS SQL Server part of this question, but the "correct" answer actually depends on the language(s) supported and application.
When you create a table in SQL Server, each text field has either an implicitly or explicitly specified collation. This affects both sort order and comparison behavior. The default, for most English (US) locales, is Latin1_General_CI_AS, or Latin 1, Case-insensitive, Accent-Sensitive. That means that, for example, a=A, but a!=Ä and a!=ä. You can also use accent-insensitive (Latin1_General_CI_AI) which treats all the diacritic variations of "A" as equal.
Some locales support other categories of comparison; for example, French orders words containing diacritics somewhat differently than German does. Turkish considers a dotless i and dotted i semantically different, so I and i don't match even with case-insensitive comparisons if you use Turkish, case-insensitive, accent-sensitive collation.
You can change the collation per database, per table, per field, and, with some cost, even per-query. My understanding is that indices normalize according to the specified collation order, which means that basically the index keeps a flattened version of the original string. For example, with case-insensitive collations, Apple and apple are stored as apple. Queries are flattened with the same collation before the search.
In Japanese, there's another category of normalization, where fullwidth and halfwidth characters like ア=ア, and in some cases, two halfwidth characters are flattened to a single, semantically equivalent character (バ=バ). Finally, for some languages, there's another ball of wax with composite characters, where isolated diacritic characters can be composed with other characters (e.g. the umlaut in ä is one character, composed with the simple form a). Vietnamese, Thai and a few other languages have variations of this category. If there's a canonical form, Unicode normalization allows the composed and decomposed forms to be treated as equivalent. Unicode normalization is typically applied before any comparisons are made.
To summarize, for a case-insensitive comparison, you do something much like you would when comparing ASCII-range strings: flatten the left and right side of the comparison "to lower case" (for example), then compare the array as a binary array. The difference is that you need to
1) normalize the strings to the same unicode form (kC or kD)
2) normalize the strings to the same case according to the rules of that locale
3) normalize the accents according to the accent-sensitivity rules
4) compare according to a binary comparison
4) if applicable, such as in the case of sorting, compare using additional secondary and ternary sorting rules, which include things analogous to things like "Mc" sorts before "M" in some languages.
And yes, Windows stores tables for all of these rules. You don't get all of them by default in every installation, unless you add support for them with the East Asian Language Support and Complex Scripts support from control panel.