His home minister, Ramesh Lekhak, was also arrested.
They were taken into custody on Saturday, a day after rapper-turned-politician Balendra Shah was sworn in as prime minister and after a recommendation last week by a Nepali panel investigating violence during the protests that they should be prosecuted for negligence.
A total of 76 people were killed in two days of unrest, which led to Oli resigning.
Police spokesman Om Adhikari said both Oli and Lekhak were being detained at the Kathmandu Police Office and would be produced before the court on Sunday, a working day in Nepal.
"We have arrested them as per the recommendations made by the investigation commission," he said.
Oli, 74 and who has had two kidney transplants in the past, was subsequently transferred to a hospital from the police office, witnesses said.
His lawyer Tikaram Bhattarai told Reuters the arrest was unwarranted.
"They have said it (the arrest) is for investigation. It is illegal and improper because there is no risk of him fleeing or avoiding questioning," he said.
Lekhak and his lawyer could not be immediately reached for comment.
The panel held Oli responsible for not taking any action to stop hours of firing that killed at least 19 Gen Z protesters on the first day of the demonstrations.
Anger over the deaths helped sweep Shah's Rastriya Swatantra Party to a landslide election this month.
