Banerjee, whose account of her escape from the Taliban two decades ago was turned into a hit movie, had only recently moved back to southern Afghanistan to live with her Afghan husband Jaanbaz Khan.
But her bullet-riddled body was discovered on Thursday close to her husband's home in the province of Paktika in what Afghan police suspect was an act of revenge by the militant Islamist movement.
Police said Banerjee had been dragged outside late in the night and shot 20 times, adding that masked men had tied up the writer and her husband before executing her.
Speaking at the family home in the eastern Indian city of Kolkata where the writer had been living until her return to Afghanistan in January, her brother Gopal Banerjee spoke of his grief.
"We are shocked and shattered after the news of our sister's death came to us on Thursday evening," Gopal Banerjee told AFP.
"My sister decided to return to Afghanistan after Jaanbaz convinced her that the situation had changed in Afghanistan and that no harm would come to her.
"We warned her against going back, but she was determined. She also said that she had some work to do there."
Indian writer Subodh Sarkar, who was a close friend of Banerjee, said he had warned the 49-year-old that she would find herself in the Taliban's crosshairs if she did return to Afghanistan.
"I warned that Taliban militants would kill her when she expressed her desire to return to the country early this year," Sarkar told AFP.
"She did not listen to us. We have lost a rebellious writer."
Her book "Kabuliwala's Bengali Wife", which was later turned into a 2003 Bollywood movie, recounts how she eventually managed to escape to the Afghan capital Kabul and take refuge in the Indian embassy.
Gopal Banerjee said that his sister appeared to have reconciled with her in-laws when he last spoke to her.
"After I'd expressed my usual apprehensions, she said she was enjoying her life in Afghanistan," he said. "She even invited us to her in-laws' home."
Reports have said that Banerjee moved back to Afghanistan to run a health clinic for women there.
However her publisher Swapan Biswas said she was planning on writing a new book.
"When I met her early this year, she said she was going to Afghanistan to stay with her in-laws and collect materials for her next book," Biswas said.
"She was a very talented writer."
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