It is a criminal offence to display the Nazi swastika but the new bill will also prevent people intentionally displaying or performing a Nazi gesture or symbol in public.
Those who do so will face fines of more than $A23,000 ($NZ25,000) or 12 months in prison.
The ban will include a broad range of symbols and gestures used by the historic Nazi Party and its paramilitary organisations to ensure those who deliberately try to circumvent the ban are punished.
"Victorians have zero tolerance for the glorification of hateful ideology," Attorney-General Jaclyn Symes said.
"We're making sure people who use these symbols and gestures to harass, intimidate and incite hate are held accountable for their cowardly behaviour."
Exceptions will apply if the performance or display of a Nazi symbol or gesture is done in good faith for a genuine academic, artistic, educational or scientific purpose.
While the offence will not prohibit the trade or sale of historical memorabilia, traders will need to cover any Nazi symbols or gestures on items that are publicly displayed.
Ms Symes said the priority of Jewish community leaders was stamping out public display of symbols that are designed to entice people to their hateful cause.
"They're not too concerned about what man-babies do in their basement in their own time," she said.
The legislation will come into effect immediately after passing parliament and receiving royal assent.
Police will have the power to direct a person to remove a Nazi symbol or gesture from public display and to arrest and lay charges.
Officers will also be able to apply for search warrants to seize property displaying a Nazi symbol or Nazi gesture.
Anti-Defamation Commission chair Dvir Abramovich said the ban sent the clear message symbols of division and hate would not be accepted in Victoria.
"The ultimate gesture of inhumanity will never find shelter here," he said.
The Victorian legislation was fast-tracked after a group of neo-Nazis crashed a Melbourne rally in March and performed the Nazi salute on the steps of parliament.
Tasmania earlier this month became the first Australian jurisdiction to ban the Nazi salute.
The Victorian Greens have welcomed the reforms but want the government to speed up the expansion of anti-vilification laws for LGBTIQ+ people.
"Our queer community is facing escalating levels of hate and Labor has kicked the can down the road for far too long," Greens MP Gabrielle de Vietri said.
Ms Symes said the Nazi salute ban was the first step in a broader suite of anti-vilification reforms, which the government aims to introduce next year following consultation.
"We want to actually make sure the laws are fit for purpose," she said.
"There is no point telling the LGBTIQ+ community the laws apply to you when we are already being told that the laws that are applying to other groups are not working working as we would like them to."
