The Supreme Court said Kejriwl - a fierce critic of Prime Minister Narendra Modi - would be out on bail until June 01, the last day of the nationwide seven-phase vote, and would have to return to pre-trial detention on June 02.
India began voting on April 19 and elections for more than half of the 543 seats in parliament have now been completed following the third phase of the vote on May 07.
The two areas governed by Kejriwal's Aam Aadmi Party (AAP) - the National Capital Territory that includes New Delhi, and the northern state of Punjab - go to the polls on May 25 and June 01 respectively.
Votes will be counted on June 04 and results are expected to be announced the same day.
"This is the victory of democracy," Kejriwal's wife Sunita posted on X after the court order.
AAP members began celebrating on hearing the news, beating drums, dancing and shouting slogans praising Kejriwal and criticising Modi as they gathered outside the party office in the capital.
"Today, the Supreme Court has struck a ray of hope in the hearts of the people who love this country, the constitution, and democracy...this is a victory of truth," Delhi Environment Minister and senior AAP leader Gopal Rai told reporters.
The court had said last week that it may consider granting Kejriwal temporary bail because of the elections, while it heard an appeal against his arrest, as that hearing could take a while to conclude.
Opposition parties have accused Prime Minister Narendra Modi's government of using investigative agencies to hurt its rivals, which the government denies.
Over the years Kejriwal has accused Modi and his Bharatiya Janata Party of damaging democracy, promoting corruption, throttling governance in Delhi, abusing their power and attacking the federal structure of the constitution among other things.
The Enforcement Directorate, India's financial crime-fighting agency, arrested Kejriwal on March 21 in connection with corruption allegations related to the capital territory's liquor policy.
Kejriwal's government and his AAP have denied the allegations. Modi and BJP say the investigating agencies are only doing their job and the government is not influencing them.
Kejriwal has been in pre-trial detention since April 01, and his wife Sunita has stepped in to campaign for his decade-old party which has been hobbled by the detention also of two other senior leaders in the same case.
Members of the INDIA alliance of more than two dozen opposition parties - Modi's main challenger which includes the AAP - said they were pleased that Kejriwal had received bail.
Mamata Banerjee, chief minister of the eastern state of West Bengal and a key INDIA member, said she was very happy Kejriwal got bail. It will be very helpful in the context of the current elections, she posted on X.
Abhishek Manu Singhvi, Kejriwal's lawyer, had argued that Kejriwal was arrested just before the vote to stop him from campaigning against Modi, who opinion polls suggest will win a comfortable majority and secure a rare third straight term.
ED lawyers argued that giving bail to a politician just to campaign risked sending the message that there were different standards for such figures compared with other citizens.
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