The arrests on Wednesday came amid street protests as communal tensions rose, and as condemnation came from Rahul Gandhi, leader of the opposition Congress, over a failure to protect the victims.
The toddler and the 11-month-old infant died after their home in Faridabad district adjoining Delhi was set on fire on Tuesday.
The father of the children, Jitender, said the family was sleeping when the attackers doused their house with petrol and set it on fire.
"Shadow of insecurity"
"Dalits have long been marginalised in India," Kaushal K Vidyarthee, a researcher on Dalit issues at the University of Oxford, told Al Jazeera.
"This incident will ensure that any remaining trust between the police/administration and the Dalit community will be completely finished. Dalits will be living under the shadow of insecurity and fear.
"The only way to regain, to prevent the breach of trust from getting worse, will be to ensure speedy justice for the family and the community."
The childrens' parents, who hail from the bottom rungs of India's millennia-old social hierarchy rooted in the Hindu religion, were both injured in the attack, a state police official said.
Jitender said the attack was a fallout from an old feud with an upper-caste group in the village.
But authorities ruled out caste violence as a motive for the crime, however India has a long history of such incidents, and the attack will feed concerns over rising intolerance after the rumour-fuelled killing of a Muslim man by a Hindu mob recently.
On Wednesday, two men carried the bodies of the dead children wrapped in white shrouds during a protest by about 1,000 people demanding action.
The protest blocked a major highway to the northern city of Agra, home to the Taj Mahal monument, and argued with police.
Al Jazeera's Nidhi Dutt in India said: "The situation on the groung remains tense, there is a high security presence which is expected to continue.
This particular area has been susceptible to caste-based violence for many years."
Haryana, the northern state, is governed by the Bharatiya Janata Party, led by Prime Minister Narendra Modi.
Eight policemen have been suspended for negligence, state police said.
"Dalits are increasingly becoming aware of their rights and raising their voice against discrimination and atrocities," added Vidyarthee. "Future efforts needs to be in that direction."
With additional reporting by Anealla Safdar
Source: Al Jazeera and agencies