The bill gives Muslims more legal security, but bans foreign funding for mosques and imams.
Muslim groups condemned the bill specifically stating the ban on funding is unfair because international support is still given for Christian and Jewish faiths. They are planning to contest the bill in the constitutional court.
Austria's Integration Minister, Sebastian Kurz, defended the reforms calling them a “milestone” for Austria and aimed to limit political influence from certain Muslim countries abroad.
"What we want is to reduce the political influence and control from abroad and we want to give Islam the chance to develop freely within our society and in line with our common European values," he said.
The 1912 law officially recognized Islam as a religion in Austria.
The legislation drew widespread reaction from Muslim around the world including Turkey's head of religious affairs, Mehmet Gormez.
"Austria will go back 100 years in freedom with its Islam bill," Gormez said on Tuesday.