The country's strict border rules have only allowed Australians and people with exemptions to enter.
From 14 July, Australia will accept just over 3,000 people a week - a measure likely to last until next year.
The announcement sparked dismay among Australians who are overseas and separated from their families.
But Prime Minister Scott Morrison said the measure would reduce pressure on the country's quarantine system.
Virus leaks from hotel quarantine - which is mandatory for all arrivals - have been the source of numerous outbreaks across the country.
Australia is maintaining a Covid-elimination strategy until it can get the majority of its population vaccinated next year. Just 8% have been vaccinated so far.
Mr Morrison's government has faced criticism for its border policies over the past year, which have extended family separations and made it difficult for many Australians to return.
In April, the government also temporarily blocked its citizens in India from returning during the height of a deadly wave in the South Asian nation. About 37,000 Australians remain stranded overseas.
To mitigate some of the cuts, Mr Morrison said the number of repatriation flights for Australians wanting to fly home would be increased.
Australia will also begin trialling home quarantine arrangements for vaccinated travellers.
Mr Morrison said arrival limits would not be lifted again until most Australians get vaccinated - a goal that will not be achieved until next year due to the country's limited supply of jabs.