Q: Wife and husband can undressed upto which level?
A. They can undress completely but should cover themselves with a sheet or blanket, etc. during intercourse. Although it is permissible to view each others private parts, modesty demands that husband and wife cover themselves. This is advice in the Hadeeth (Musannaf Abdur Razzaaq V6 P194). This Hadeeth says that when going to the wife (to fulfill one's desire), do not be naked like asses.
It is mentioned that viewing each others private parts causes forgetfulness.
Moulana Yusuf Laher
Checked and approved by: Mufti Siraj Desai