After an hours-long operation, firefighters rescued 35 people from the hotel, most of which was engulfed in flames.
The Delhi government has, meanwhile, ordered a magisterial probe into the Karol Bagh fire incident, said Health Minister Satyendra Jain.
Fire was reported on third and fourth floor, but the blaze spiralled down as well.
Three Myanmar citizens staying at the hotel were missing, the NDTV news network reported.
Last week, a fire broke out in a hospital in a Delhi suburb, forcing emergency evacuation of patients. But the building appeared to have six floors, including a basement and a kitchen built on top of the roof, Jain said.
At least 25 fire tenders responded to a call at 4.30 am to conduct rescue operations.
"There was wood panelling on the corridor because of which people couldn't use corridors to evacuate; two had jumped off the building".
Mandeep Singh Randhawa, deputy police commissioner, said authorities are still investigating what sparked the fire.
The hotel is in the Karol Bagh district, a busy commercial centre crisscrossed by narrow alleys where electric wires dangle overhead.
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The area, which houses hundreds of hotels, shops and offices, is packed with tourists and shoppers.
"They came here from south India to attend a wedding".
The fire has already raised questions about safety in poorly regulated budget hotels in the country.
At least 17 people are dead as a result of the blaze overnight in New Delhi, India.
Many structures, both old and new, lack proper fire exits.
Also, an eye-witness said:"Within minutes the fire accompanied by dense smoke engulfed the whole hotel, leaving nearly no space for the occupants to rush to safety".
The hotel comprises of basement, ground floor and four other floors.
Generally, four floors are allowed for such establishments, the minister said.