India's action comes ahead of the January 13 deadline for the indictment in New York of Khobragade, deputy consul general in New York, on visa fraud charges.
Acting tough, the government has asked the embassy to stop commercial activities undertaken under the aegis of the American Community Support Association, including restaurant/bar, video club, bowling alley, swimming pool, sports field, beauty parlour and gym.
The US has also been asked to provide the tax returns filed by it with Indian authorities for commercial activities which are afforded through ACSA to non-diplomatic persons, including private American citizens and their families, government sources said here.
Indian authorities have cited the provision of such commercial facilities to non-diplomats as a violation of Article 41(3) of the Vienna Convention on Diplomatic Relations 1961.
The convention states that "the premises of the mission must not be used in any manner incompatible with the functions of the mission as laid down in the present convention or by other rules of general international law or by any special agreements in force between the sending and the receiving State."
It is also understood the US diplomatic vehicles will now attract penalties for all traffic-related offences such as unauthorised parking, red light jumping, dangerous driving, etc.
Necessary action against vehicles with AF (Applied for) number plates is also on the cards.
A 1999-batch IFS officer, Khobragade was arrested on December 12 on charges of making false declarations in a visa application for her maid Sangeeta Richard. She was released on a $250,000 bond.
India has been demanding the withdrawal of the case against her and an apology from the US for the treatment meted out to the 39-year-old diplomat, including a strip search and detention with criminals after her arrest.
The incident led to strong protests by the Indian government and widespread indignation in India. At the time of her arrest, Khobragade was the deputy consul general in New York. She was subsequently transferred to India's permanent mission to the United Nations.
India has retaliated by downgrading privileges of a certain category of US diplomats among other steps last month.
US consular officials in four consulates in India are being issued new ID cards specifying the limited immunity which will not protect them from serious offences. This is in line with the restricted immunity given to India's consular officials in the US.
Families of American consular officials will no longer have diplomatic ID cards, an out of way privilege enjoyed by them in India. Families of Indian consular officials do not have any such privileges.
The US consular staff is now only permitted to import their requirements during the first six months on assuming office as is provided in the Vienna Convention for Consular Relations. Previously, they were allowed to import their requirements over the three year period of tenure.
Image: A private security guard stands outside the US embassy in New Delhi
Photograph: Anindito Mukherjee/Reuters