Ms Masood, who was 39, was found dead in her car outside her home in August last year. She was about to head to an anti-corruption rally, one of many that was being held across the country to support activist Anna Hazare, who was on a lengthy hunger strike in Delhi at the time.
The CBI says that Ms Parvez shared "a personal rivalry" with Ms Masood, and hired a hitman to kill her. That man has also been arrested by the agency. Ms Masood's father said today that he does not know the interior designer and is not aware of any link between his daughter and her.
Last evening, the CBI summoned the interior designer for interrogation to its office in Bhopal. She was arrested soon after.
According to Press Trust of India, sources in the CBI say that Ms Parvez has confessed that she commissioned the activist's killing because she suspected her husband was having an affair with Ms Masood.
Initially, the Bhopal police described Ms Masood's death as a suicide. But a series of media reports forced them to begin treating it as a murder. A series of high-profile people from Bhopal were then interrogated. They included Tarun Vijay, an MP for the BJP from Uttarakhand who had spoken to her just hours before her death, and an MLA, also from the BJP, named Dhruva Narayan Singh.
The police also revealed that Ms Masood had written to a senior police official alleging that she feared retribution from the Inspector General of Indore, Pawan Srivastava. She said that he had been threatening her after she used a Right to Information or RTI application to track financial irregularities in his department.