Wee Meng Chee, 27, better known as Namewee to his fans, made national headlines three years ago over another YouTube clip mocking the national anthem which authorities also said was seditious.
He apologised for that incident, but is in fresh trouble for posting a three-minute rap titled "Nah" criticising a Muslim Malay headmistress accused of making racial slurs against her ethnic Chinese and Indian students.
"We are investigating him under the Sedition Act," Bakri Zinin, the Federal Criminal Investigation chief, told AFP, adding that Wee will soon be called to give a statement.
Wee faces up to three years in prison if he is charged and convicted.
The rapper removed the video from YouTube on yesterday, after prompting criticism from various parties including Prime Minister Najib Razak who reportedly urged action against those who try to stoke racial tensions.
"We don't care whether he has removed the video or not, the harm has already been done, we will continue with the investigation," said Bakri.In the video, which is still available on other websites, Wee used obscene language and rapped in a mixture of English and the national language Malay.