The government said in a statement that it had accepted the resignation of Chief of Naval Staff Admiral DK Joshi, who will be replaced on an acting basis by Vice Chief of Naval Staff Vice Admiral RK Dhowan.
A search continued for the two officers after smoke filled parts of a Russian-built submarine on a training exercise off the Mumbai coast in the early hours of Wednesday morning.
The accident comes months after a dockside blast in Mumbai killed all 18 aboard another submarine last August, raising concerns over India's ageing fleet and crew training.
Seven members of the 94-strong crew were evacuated after inhaling smoke aboard the diesel-powered INS Sindhuratna.
Commander Rahul Sinha, a naval spokesman, said the source of the smoke had been removed, but declined to give details.
"When there is a fire in a submarine, the smoke is extremely toxic. There will be time before we enter the compartments completely," Sinha said. The two officers could not be accounted for more than 12 hours after the incident.
Without apportioning direct blame, the government said that Joshi had taken "moral responsibility for the accidents and incidents which have taken place during the past few months".
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