The 71-year-old was found by villagers on Wednesday at an ancient Buddhist chapel in Virat Nagar, a town 90 miles north of Jaipur, police said.
Knaebel, who idolised Gandhi, left a suicide note blaming cruel incidents in both the United States and India.
He did not give any further explanation for his death, but did leave behind around 48,000 rupees ($1,000).
He also left a shoulder bag containing glasses, books on Gandhi and a note asking that the money was given to poor widows and farmers, according to police.
He had been spotted in the town three days earlier and was seen by villagers wearing an Indian-style long cotton shirt, woolen sweater and a scarf.
It is understood he may have timed his death to coincide with India's Republic Day, which celebrates the signing of the country's constitution.
He had previously been denied asylum in the country and had had an application for citizenship denied.
Knaebel was travelling across the country to avoid being arrested for not having any documentation.
'Citizenship denial and harassment by police ... made him a very desperate person, but he continued to believe in the principles of Gandhi and often said he would never return to the U.S. and would die in India,' his friend and fellow engineer V.K. Desai told the Associated Press.
Desai remembered Knaebel as an intelligent and honorable man who delighted in nature, gave his money to the poor, and worried increasingly about inviting police action against his friends if he stayed with them on his travels.
Knaebel was identified from a passport issued in July by the World Government of World Citizens, an organisation based in Washington, D.C..
His body now lies in a hospital morgue, police said. The U.S. Embassy declined to comment for privacy reasons.
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