The number of significant digits in 0.1km is 1 and we know that 1 km = 1000m.
This then implies that the 0.1 km is equal to 100.0 m, but the rule says the change in units doesn't affect the number of significant digits
So how come the value in m has more significant digits?
I am really confused by it and the error I can find is that the value in m should be 100 m, then the number of significant digits would be same but then the question arises that can we remove decimal like this.
On
1 km is 1000m, so 100 000 cm, therefore you'll get 0.1km = 10 000cm. Both 0.1km and 10 000cm have the same number of significant digits.
On
$0.1$km with one significant digit means the value you are interested in is between $0.05$km and $0.15$km. That puts it between $50$m and $150$m. In scientific notation that's $1 \times 10^2$m. which preserves the single significant digit precision. When you write $100$m you have (implicitly) three significant digits - the zeroes might be significant.
When you take significance seriously you should always use scientific notation, writing (for example) $$ a.bcd \times 10^n $$ for four significant digits. Then the unit conversions (in the metric system) affect just the exponent.
$0.1$km ($1.0 \times 10^{-1}$km) has two significant digits. $100.0$m ($1.000 \times 10^3$m) has four.
You are right, writing $100.0\,m$ usually implies that the value is accurate up to the first decimal, hence with an accuracy of $1\,dm$ and $4$ significant digits, whereas unless otherwise stated $0.1\,km$ is accurate to a tenth of a kilometer and has a single significant digit.
So it would be more correct to say
$$0.1\,km=100\,m,$$ though some doubt can remain about the number of significant digits in the RHS.
After re-reading the question, I seem to understand that keeping one digit after the decimal point is your choice. This is not the way it works, you have to keep the same number of significant figures, not the same number of decimals.