The haveli or bungalow in the Saurashtra city of Junagadh, 325 km from here, was always a government property, officials now insist.
"We have sealed the property as it belongs to the government," Junagadh public works department executive engineer V.B. Pethani said.
Parveen Babi's father Vali Khanji was a senior revenue officer in the erstwhile princely state of Junagadh.
The then Nawab of Junagadh Mohabbatkhan had allotted the mansion to Khanji in 1920. When the last Nawab of Junagadh decided to move over to Pakistan after the country's partition in 1947, his property was taken over by the government.
The government, however, did not ask the occupants to vacate the residence and a nominal rent was collected from them.
"Since 1952, the Babis have been living as tenants at the residence," Pethani said.
"After the death of Parveen's father, the tenancy was transferred in her mother's name.
"However, the tenancy was not transferred in Parveen's name later. She did not claim any rights over it either. Moreover, rent has not been paid for more than two years," Pethani said.
As Parveen Babi left no will and there is no legal heir, her kith and kin started laying claims to the property valued at about Rs.10 million.
"If any person can prove his or her right over the property, we will follow the legal advice," he said.
The authorities have also served a notice to the two families that live in the sprawling residence on rent asking them to vacate the property in 15 days.
"We were worried ever since we heard news reports that they are going to seal this property," Muddasar Baloch told a local news channel.
He said the two Muslim families were paying rent at old rates and it would be difficult for them to find a place within their budgets.
"We have been living here for more than 25 years. Where do we go now?" asked Jenuma Baloch.
Parveen Babi, among the most popular faces in Bollywood in the 1970's, was found dead in her Mumbai flat last month.