The judges asked the government to refrain from registering any new cases which invoke sedition until it finishes hearing petitions challenging it.
The court also asked the authorities to pause all existing sedition trials.
The government has been accused of using the law against critics, such as politicians, journalists and activists.
On Tuesday, the government said that they would review the law after earlier defending it.
While pausing the court hearing on Wednesday, the judges said that those already charged under the law, and in jail, could seek bail from trial courts.
Kapil Sibal, senior leader of India’s opposition Congress party and lawyer for the petitioners, told the Supreme Court that there were over 800 cases of sedition pending across India and as many as 13,000 people were in jail.
A majority of sedition cases filed against 405 Indians for criticising politicians and governments over the last decade were registered after 2014 when Prime Minister Narendra Modi took power, according to data compiled by the website Article14.
Too early to celebrate?
Soutik Biswas, BBC News, Delhi
The Supreme Court’s decision to pause the sedition law is a significant development.
For decades, successive governments have used the colonial-era law – the dreaded section 124a of the antiquated Indian Penal Code – against students, journalists, intellectuals, social activists, and those critical of the government to essentially suppress dissent and free speech.
A law which was mainly used against Indian political leaders seeking independence from British rule in the 19th and early 20th centuries has now been weaponised as a tool of suppression by successive democratically elected governments. That is, many say, is India’s shame.
But it would be too early to celebrate.
It remains to be seen how Narendra Modi’s government “re-examines and reconsiders” the draconian law. Will it be defanged and modified? Or will it be scrapped?
Most Indians will be happy to see the law, which they say has no place in a modern democracy, to be given a quick burial.
The law made headlines last year when it was invoked against a student who shared a document intended to help farmers protesting against agricultural reforms.
The offence is punishable by a monetary fine or a maximum sentence of life in prison, or both.
In 1962, the top court had imposed limits on the use of the law, but critics say authorities in India continue to flout these restrictions with impunity.
They say the law is mostly used to intimidate people who protest against authority. Given India’s slow moving judicial system, these cases get stuck for years.
Meanwhile, people charged under the sedition law have to surrender their passports, are not eligible for government jobs and must produce themselves in court whenever required.