Washing of hard surfaces such as driveways will be prohibited from June 1.
Sydney was last placed under water restrictions in 2003, with the limitations only eased in 2009.
"Water restrictions in Sydney mean that households across NSW are doing their bit to conserve water", the south-eastern state's Minister for Water Melinda Pavey said in a statement.
The state has received less than 70% of its typical average rainfall since May 2017, according to meteorology bureau data.
A tweet posted earlier this month by WaterNSW, the region's bulk water supplier and river operator, warned: "This is one of the most severe droughts ever recorded in NSW".More news: Boris Johnson to appear in court over misconduct claims
More news: Launch Date for Galaxy Fold Still Not Fixed
More news: Razer Announces Razer Blade Studio Edition: Quadro RTX And Improved Displays
They are an important element of Greater Sydney's drought response as they help reduce water demand when we're not getting enough rain.
Sydney is not supposed to face formal restrictions until Warragamba Dam drops to 50 per cent capacity.
A range of exemptions will also be available to businesses in situations where water is critical to their operations, Sydney Water's Catherine Port said.
Under the city's Metropolitan Water Plan, restrictions are set to come into effect when dam levels drop to less than 50 per cent.
In April, a survey commissioned by Sydney Water found that more than 60% of Sydney residents were unaware of the current drought. This means restrictions would have been enforced in about two months had the government not chose to act early.