I believe their intention is to harass you, just in case you have another job abroad. They probably are checking whether you have a visa stamped. And if so, then, they will keep the passport and harass you, so that you cannot join abroad. Just give them a photocopy of your passport as an attachment through email and in that mail, you may kindly mention that as per the Indian Passport act, you are not supposed to give the passport to anyone without the approval from the Government of India. If you recall, Sonia Gandhi refused to hand over the passport to the American court recently, stating she does not have the approval from the Government of India. If they insist, ask them to get the approval from the Government of India, since you are a law abiding citizen. Do not interact verbally on this matter. Put everything in writing.
The reason am stating this is because, I was deputed to Switzerland in the year 2000 from my erstwhile company as part of a team to acquire a company there. I came back and within a couple of months, I received a job offer in Far East. When I resigned, I was asked to hand over my passport to issue the relieving order. When asked as to why they require the passport, they said they wanted to check the validity of my Swiss Visa and if it is still valid, then they will get it cancelled. But, I knew that they were trying to check whether I am joining a competitor who was also interested in the Swiss company. My brother in law who is a lawyer, asked me to send the passport copy by email and tell them that you cannot hand over the passport since it's against the law. I did so. I got my relieving order within 2 days after sending the mail.
It's unfortunate that a few so called professionals want to harass exiting employees, not realizing that ex employees can be good ambassadors and enhance the brand equity of ex employers, if treated well when leaving the company.