The families are living in over 200 servant quarters built on 14 acre land where the memorial is planned to be built and they have to be removed from there, Defence Ministry officials said.
People living there have been offered alternative land in Delhi Cantt and some other nearby areas for building their houses, they said.
Defence Minister Arun Jaitley, who had visited the site two weeks ago, was also briefed by top Army officers including Army Chief Gen Dalbir Singh Suhag on the issue at the proposed construction site.
The Defence Ministry is preparing a Cabinet note for the construction of the National War Memorial at the India Gate complex and the National War Museum at the Princess Park at a cost of Rs 400 crore.
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The need for removing the encroachments before commencing the construction will also be mentioned in the note, the officials said.
The museum and the memorial are planned to be connected through an underpass.
The Army had given a presentation to Prime Minister Narendra Modi on the issue on August 6 where the force was asked to involve international designers and architects to build a grand memorial as promised by BJP during Lok Sabha poll campaign.