New Delhi schools will shut for a week and construction sites for four days to try to protect people from air pollution.
Air quality in India's capital has worsened due to factors such as transport emissions, crop stubble burning and coal-fired power plants.
The city's score on the air quality index has risen to 470-499 on a scale of 500, the federal pollution control board said on Saturday.
It indicates that healthy people will be affected by the pollution, while those with existing diseases will be seriously impacted.
The chief minister of New Delhil, Arvind Kejriwal, said talks on the possibility of a complete lockdown were also under way but that a decision would only come after consulting central government.
"For a week from Monday onwards, schools will be physically closed but will continue virtually so that children don't have to breathe polluted air... construction activities not to be allowed," Mr Kejriwal said.
All government offices would shift to home working and private offices advised to follow suit to limit vehicles on the road, he added.
India's chief justice has asked the government to produce an emergency plan to fight the smog.
"We have been forced to wear masks at home also, the situation is very serious," said N. V. Ramana.
He said the government should consider a two-day lockdown to protect people and inform the court on Monday about an emergency plan.
New Delhi and other Indian cities frequently rank among the world's worst cities for air pollution.
A live air-quality ranking by the IQAir website put the Indian capital second behind Jerusalem on Saturday, with Kyrgyzstan capital Bishkek third.