The green Hyundai Accent car forfeited under the Smugglers and Foreign Exchange Manipulators (Forfeiture of Property) Act.
A car belonging to underworld don Dawood Ibrahim, which was auctioned recently in Mumbai, was set on fire by the person who bought it, in Uttar Pradesh's Ghaziabad district near Delhi.
"The burning of the car was a symbolic destruction of terrorism," said Swami Chakrapani, the national president of the All India Hindu Mahasabha who set the car on fire in the presence of around 200 supporters.
Jamiat Ulema-e-Hind president Maulana Suhaib Qasmi along with about a dozen supporters was also present.
Dawood Ibrahim is wanted in India for the 1993 serial bomb blasts in Mumbai that killed 257 people and injured nearly a 1,000 others.
The green Hyundai Accent car forfeited under the Smugglers and Foreign Exchange Manipulators (Forfeiture of Property) Act was purchased by Chakrapani at the auction for Rs 32,000 on December 9.
All India Hindu Mahasabha's Swami Chakrapani set the car on fire in the presence of around 200 supporters.
Mr Chakrapani told reporters in Ghaziabad that he earlier planned to modify the car into an ambulance.
"It is a symbol of terrorism and all patriotic people, including Hindus and Muslims, have assembled here to destroy terrorism symbolically and pave the way for peace in the country," he said.
Mr Qasmi said Indian Muslims were as patriotic as the Hindus in the country.
"Islam never teaches terrorism and violence. Those involved in terrorist activities are not the true followers of Islam. Jamiat members are therefore participating in the symbolic destruction of terrorism through burning of Dawood's car," he said.