An official council statement on Tuesday said they would be expelled by the end of the year because of their "dark history".
The People's Mujahidin, or Mujahidin-e Khalq Organisation (MKO), set up base in Iraq in 1986 from where it carried out regular cross-border raids in Iran.
The council statement did not say where MKO members would be sent when they are expelled, but said its offices would be closed and its arms and financial resources confiscated.
The money would "be given to the compensation fund for victims of the former fascist regime" of Saddam Hussein.
"Iraqi individuals and bodies have the right to bring complaints against this organisation for its crimes and ask to be compensated by the funds this organisation has both inside and outside the country," the council said.
Several thousand Mujahidin militiamen were disarmed by US forces following the fall of Baghdad in April and barred from undertaking military operations.
Around 4000-5000 people were grouped in Camp Ashraf, the main Mujahidin base in Diyala province northeast of Baghdad, where they were screened for "terror activities".
The US army announced in September it had detained 3856 members of the Mujahidin.
The group kept out of the US-led war, although their bases were bombed by US warplanes. After lengthy negotiations, the MKO struck a deal with the US-led invaders and withdrew to Camp Ashraf.
Mujahidin officials denied reports that splinter elements had fled to the mountains separating Iran and Iraq.
MKO supporters say they are
Washington announced on 22 April it had reached a ceasefire with the Mujahidin. The following day officials of the group said the agreement allowed it to keep its weapons and carry on its activities in Iran from Camp Ashraf.
But US officials denied the claim when hundreds of military police took control of Camp Ashraf in June.
The group was a well-armed fighting force that, with backing from Saddam, had continued a guerrilla insurgency against the Islamic government in Tehran since 1988.
Both the United States and Iran consider it a terror organisation because its attacks have often killed civilians.
The United States also banned the group's political wing, headed by husband and wife Masud and Maryam Rajavi, and froze its bank accounts.
But despite the MK0’s violent tactics, the group’s strong stand against Iran and pro-democratic rhetoric have won it support among some US and European lawmakers.