With the waters rising and Wednesday's deadline given by the Madhya Pradesh state authorities for the 6,166 affected families to move to safer ground already passed, only about 2,430 households had resettled, said state water resources minister Anoop Mishra.
Residents of Harsud and some 120 surrounding villagers had been warned they would have to move when work on the Indira Sagar dam on the river Narmada got underway as long as a decade ago.
Mishra said 95 of the villages had been vacated and 25,508 of the total 28,798 families affected in the area had been resettled.
But thousands of families in Hardsud, some 235 kilometres (146 miles) from the state capital Bhopal, were still refusing to move despite the offer of relocation packages ranging from 20,000 rupees to 500,000 rupees (440 dollars to 11,000 dollars) if they moved voluntarily before June 30.
Some residents told AFP they would not move because the compensation was inadequate, while others did not believe the waters would reach their houses. Still others nostalgically said they would wait until the last minute before leaving their ancestral homes.
A local official said heavy rains in central India due to the monsoons had caused the waters of the dam to rise to 236 feet (72 metres) and once it crossed the 245 feet (74.6 metre) mark, Harsud would be completely submerged.
The dam is being built to generate 1,000 megawatts of electricity to help meet Madhya Pradesh's power shortfall.
Those who have moved, meanwhile, complained that facilities in the new settlement area, in nearby Chanera village, were inadequate and that the settlement lacked roads, power lines, water and schools.
According to the former chief minister of Madhya Pradesh, Digvijay Singh who ruled the state for a decade, Harsud's residents were to blame for their predicament.
"They refused the construction of a protective wall around the town which would have prevented submergence," Singh told reporters after a visit to the town this week.
But people argued that they refused to build the wall because Harsud would then become an island.
Singh also criticised the present Hindu nationalist state government for the poor facilities at the resettlement centres.
Those resigned to move were seen this week tearing down doors, window panels and whatever else they could salvage from their houses.
Caravans of buses and trucks loaded with goods were seen leaving the town, which ceased to exist in the official records of Madhya Pradesh on Wednesday.