The changes make it illegal by a public act to incite hatred or serious contempt or to severely ridicule a person or group because of their religious belief, affiliation or activity.
Vilification is defined as abusively disparaging speech or writing.
Premier Chris Minns said it was an important election promise to fulfil.
"The NSW government supports a peaceful, multicultural society. There cannot be room for hatred which sows the seeds of mistrust and intolerance," he said on Sunday.
Religious vilification has become a hot-button issue since the latest outbreak of violence in the Middle East brought ongoing demonstrations from Palestinians and Israelis across the state, particularly Sydney.
The premier said abusing people on religious grounds "threatens the thriving, tolerant, multi-religious and multi-ethnic heart of NSW".
"We must all champion community harmony and togetherness, and choose peace and solidarity over hatred and division," he said.
The amendments add to existing legislation that bans vilification on the grounds of race, homosexuality, transgender status and HIV/AIDS status.
Attorney General Michael Daley said the new laws were essential to reflect Australia's changing society.
"The make-up of our society has changed since the anti-discrimination act became law and we have enacted legislation that reflects and protects our modern society," he said.
Complaints will go to Anti-Discrimination NSW, to be dealt with through conciliation.
Complaints can also go to the NSW Civil and Administrative Tribunal in certain circumstances, and if a complaint is substantiated, the tribunal may order an apology or damages of up to $100,000.
NSW Minister for Multiculturalism Steve Kamper said the government worked closely with religious organisations and community advocacy groups to get the legislation right.
"This much-needed legislation will provide our faith communities with similar protections provided to members of diverse and multicultural communities," he said.
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