Anybody who is in similar situation, we were able to apply for passport renewal while being out of status. We had to write an email to the Indian consulate requesting for permission to apply for passport renewal. We had to attach AIP(Approval in Principle) with the Principal Applicant name. When filing for the application, we had to print the email reply from the Consulate giving us an approval to apply.
At this time, IRCC does require a valid passport with 12 month validity. We were requested to update the passport just 2 weeks from today.