Pakistani-born Nauroze Anees, 26, was with his father, who was on holiday in Australia, at Clayton railway station when the incident happened, leaving the pair horrified.
Mr Anees said he would make a complaint to the Independent Broad-based Anti-corruption Commission about the PSO's treatment.
"The PSO walked up to me in an aggressive way and said, 'Give me your ID'," Mr Anees said.
He asked why and was told: "You match the description of a terrorist".
"He told me unless I gave him my ID he would handcuff me and it would really hurt. He was harassing me and racially vilifying me," Mr Anees said.
The incident, which happened last Wednesday at about 8pm, comes just a month after Chief Commissioner Ken Lay put bigots in the ranks on notice, vowing not to tolerate such behaviour.
Australian Federal Police said it could not comment for privacy reasons, but the Herald Sun has confirmed Mr Anees is not on a terror watch list.
Mr Anees also plans to make an official complaint to Victoria Police.
Mr Anees, who has lived in the country for six years, said he handed over the ID out of fear and because his father, who had only been in Australia for four days, started "freaking out" and crying.
"It was heartbreaking to see him like that - I felt helpless," he said.
Mr Anees, who studied commerce at Deakin University, said never in his life had he been called something so offensive.
"I felt humiliated and deeply hurt," he said. "I have been left traumatised by the incident. Everyone was watching what was happening because he was making a scene out of it."
Mr Anees said his father wanted him to leave the country.
"He is also left traumatised because of this and he fears for my safety now," he said.
"My father loved this country, but this incident has made him question everything about it.
"But I love this country - it has given me so much opportunity. I'm not going to let one bad apple destroy the whole name of this country.
"I am going to stand up for my civil liberties and fight against racism.
"At the end of the day, I know justice will be done."
Mr Lay said racism within the force was undermining the public's trust in it and that damage had already been done.