A navy statement said its "rules and regulations do not permit the sailor's continued employment" because of "irreversible gender reassignment".
Sabi, formerly Manish Giri, has said that she will appeal to the military court against her sacking.
It has sparked a debate on transgender rights in India, where it is legally recognised as a third gender.
Sabi joined the Indian navy in 2010. She underwent gender reassignment surgery in late 2016 while on leave.
