The bomber detonated a Toyota 4x4 packed with explosives early on Thursday morning just outside the embassy in one of the Afghan capital's most heavily guarded districts.
The blast devastated a row of shops outside the embassy compound, killing shopkeepers, a policeman and passers-by including women and children.
No one was killed inside the embassy in the latest incident, but three guards were wounded by shrapnel.
An Indian diplomat said the death toll would have been higher had the bomber struck an hour later during the visa department's working hours.
Ahmad Jan Kurami, 34, who was nearby at the time of the blast said he has seen at least three dead bodies being dragged from a car. "There was dust everywhere, I couldn't see anything at first," he said.
The embassy has been surrounded by sandbags and blast walls since a suicide bombing in July 2008 left more than 58 dead.
President Hamid Karzai blamed that attack on Pakistan's ISI intelligence service, which regards India's aid and road-building programme in Afghanistan with suspicion. It believes India is expanding its presence in Afghanistan to foment unrest in Pakistan's restive Balochistan province.
American officials said at the time they believed "rogue" ISI agents, who had been identified in intercepted telephone conversations, had played a role in the plot.
Senior US military figures have since voiced understanding of Pakistan's concerns over India's engagement in Afghanistan. General Stanley McChrystal, commander of Nato forces in Afghanistan, last month said "increasing Indian influence in Afghanistan is likely to exacerbate regional tensions and encourage Pakistani counter-measures".
Indian officials denounced Thursday's attack, which they said was motivated by the same aims as last year's bombing, and vowed to maintain their support for the Kabul government. Nirupama Rao, the foreign minister, rejected criticism of India's presence in Afghanistan and said it would "invest and endure, because we believe in the cause of peace, democracy and development in Afghanistan".
Mr Karzai said the bombing was a "barbaric" attack aimed at "defenceless Afghan civilians".
A Taliban spokesman, Zabiullah Mujahid, claimed responsibility for the bombing in a statement on a militant website.
