In a statement, Prime Minister Manmohan Singh said in a statement that he was deeply grieved and outraged at the cowardly and brutal murder of Mr Kutty.
Kutty, who was working on a road project in Nimroz province in southern Afghanistan, was abducted by the Taliban on November 19. He was killed by them after the deadline set on Tuesday to stop work on the project, expired. His body was found on a road between Zaranj, the provincial capital of Nimroz province, and Ghor Ghori.
The slaughtered body of 36-year-old Kutty was found dumped by the roadside in Delaram district of Nimroze province, governor of Khashroad, Mohd Hashim Noorzai, was quoted as saying by international news agencies in Kandahar.
The government announced that the family would receive Rs 10 lakh as compensation and benefits with free education up to the secondary level for Kuttys two children and assured that no stone would be left unturned to ensure their livelihood and security.
Taliban spokesman Qari Mohammad Yousuf claimed responsibility for the kidnapping and said on Tuesday Kutty had been killed after a deadline for his company to announce its withdrawal form Afghanistan had passed.
Afghanistan President Hamid Karzai also called up Dr Singh and expressed his condolences. He also said that security will be increased for all Indian personnel in Afghanistan.