The distinctive black, red and yellow flag will fly alongside the Australian flag and New South Wales state flag at the top of the bridge as part of a "broader move towards reconciliation."
The Aboriginal flag will fly permanently on the Sydney Harbour Bridge as part of a "healing process" and reconciliation efforts with Australia's indigenous community.
The government of Australia's most populous state said on Sunday it would spend $17 million ($A25 million) to permanently install a third flagpole on the landmark bridge by the end of the year to fly the flag.
"It's an important decision that we've made, I think it brings unity to our country and it's a small price to pay for that unification," New South Wales Premier Dominic Perrottet told reporters in Sydney.
Perrottet said the move represented a continuation of "the healing process as part of the broader move towards reconciliation."
He said the move highlights efforts to promote better ties between the wider Australian community and Aboriginal and Torres Strait Islander peoples.
The Aboriginal flag, recognised as an official flag of Australia since 1995, is flown from government buildings and embraced by sporting clubs and athletes of Aboriginal heritage.
The federal government this year acquired copyright to the Aboriginal flag so it could be freely used, resolving a commercial dispute that had limited sporting teams and Aboriginal communities from reproducing the image.
The flag's colours represent the Aboriginal people and their spiritual connection to the land. It was first raised in 1971 at a land rights rally in the state of Victoria.