Alt News website reported on Wednesday that the ministry used the picture in its annual report to show that it had installed floodlights in border areas.
But the website said the picture was taken in 2006 by Spanish photographer Javier Moyano of the Ceuta enclave.
The ministry has reportedly ordered an inquiry into the “embarrassing gaffe”.
Prime Minister Narendra Modi’s government has faced similar online mockery in the past for using wrong or photo-shopped pictures in official press releases and reports.
India’s state-run Press Information Bureau in 2015 tweeted an obviously edited image of Mr Modi surveying deadly Chennai floods.
In the latest gaffe, the home ministry included the picture in its report which was published on its website.
After Alt News reported the error, many Indians took to Twitter to mock the ministry.
The NDTV website reported that Home Secretary Rajiv Mehrishi had demanded an explanation from officials.
“If it’s a mistake by the ministry, we will apologise,” he said.
The ministry has been installing floodlights in border areas to check smuggling and infiltration.
In its annual report, the ministry said it had floodlit 647km (402 miles) of India’s border with Pakistan and Bangladesh.
Officials said it was unclear how a wrong picture made its way into the annual report.
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