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. If so, they might 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. In that email, you may kindly mention that, as per the Indian Passport Act, you are not supposed to give the passport to anyone without 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 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 I 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 the Far East. When I resigned, I was asked to hand over my passport to issue the relieving order. When asked why they required the passport, they said they wanted to check the validity of my Swiss Visa, and if it was still valid, they would get it cancelled. But I knew that they were trying to check whether I was 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 and got my relieving order within 2 days after sending the email.
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.