The opening batsman had wanted to wear shoes emblazoned with the hand-written slogans "Freedom is a human right" and "All lives are equal" during the match at Perth.
But Pakistan-born Khawaja, who is Muslim, was told that it flouted International Cricket Council rules on messages that relate to politics, religion or race.
With Cricket Australia saying it expected the players to uphold the rules, Khawaja covered over the slogans with semi-transparent tape leaving the words - in the colour of the Palestinian flag - visible only in close-up.
According to local media, Cricket Australia said Khawaja was wearing the armband as a show of solidarity.
Many thousands of Gazans have been killed in the 10-week-old war, sparked by Hamas raids into Israel on October 7 that killed 1,200 people.
In a video Khawaja recently shared on Instagram, he asked: "Do people not care about innocent humans being killed?"
Khawaja has vowed to fight the ban on his footwear, calling it "a humanitarian appeal".
He doubled down on his stance just before going in to bat in the first Test on Thursday.
"I just think that so much has happened in the past that sets a precedent," Khawaja told Fox Cricket.
"Other guys that have religious things on their equipment, under the ICC guidelines that's not technically allowed, but the ICC never says anything on that," he added.
Australian captain Pat Cummins said he was "really proud" of his teammate and of other squad members who had spoken up for what they believe in.
