With the Indian capital already on heightened alert because of farmers' protests, the district around the embassy was sealed off and flooded with police, paramilitaries, bomb disposal experts and anti-terrorism specialists.
According to media reports, the device, which went off at about 5.05pm (1135 GMT), could have been left in a flower pot on the pavement close to the embassy.
The Israeli foreign ministry confirmed that there were no casualties and that no damage was done to the embassy.
Foreign minister Gabi Ashkenazi had asked for "all necessary security measures" to be taken, said a statement.
The incident came on the 29th anniversary of the establishment of diplomatic relations between India and Israel.
The countries have since become close, and India is now one of the biggest buyers of Israeli defence equipment.
India's prime minister Narendra Modi visited Israel in 2017, and his Israeli counterpart Benjamin Netanyahu made a high-profile return visit a year later.
In February 2012 a bomb attack on an Israeli diplomatic car in Delhi injured the defence attache, an embassy staffer and two other people. Netanyahu blamed Iran for the attack.
The latest incident took place close to where Modi and other government and military leaders were attending an army parade.
Delhi has been on major alert this week after farmers' protests against government agriculture reforms deteriorated into serious unrest on Tuesday.