Levels of PM10 particulates, considered hazardous to health, rose to 999 micrograms per cubic metre, way above the safe limit of 100.
Authorities had warned that Delhi was in for a polluted Diwali due to factors like humidity and wind speed.
Fire crackers are regularly set off during Diwali but worsen air quality.
Delhi's local government announced last week that it would install air purifiers near roads in an effort to cut the effects of air pollution.
However, visibility across the city was extremely low on Monday morning, thanks to the thick blanket of smog covering the city. On Monday morning, the hashtag #smog was trending on Twitter India.
"Good show last night, Delhi. Now choke!" read one angry tweet from user Pratik Prasenjit.
Before Diwali, there were several campaigns asking people to cut down on the use of fireworks, but similar campaigns in the past have got little attention.
Fire crackers have become synonymous with celebrations, and for some, it is an opportunity to show off their wealth. Business families spend hundreds of thousands of rupees to buy fireworks which are then set off in the course of a single night.
A World Health Organisation (WHO) survey in 2014 found that 13 of the most polluted 20 cities in the world were in India. Delhi was the most polluted city in the world, the survey added.
Air pollution is also a leading cause of premature death in India, with about 620,000 people dying every year from pollution-related diseases, says the WHO.
Apart from fireworks on Diwali, Delhi's pollution in winter is aggravated by a drop in temperature which leads to the city's poor burning rubbish at night to stay warm.
Agricultural waste is also set on fire across thousands of hectares around Delhi to clear cropland, which burns for days on end.