The Serbian star overcame a hamstring injury and off-court drama on his return to Melbourne Park to sweep past Tsitsipas 6-3, 7-6 (7/4), 7-6 (7/5) on Rod Laver Arena.
He surged to victory without father Srdjan in the stands after he sparked controversy by posing with a fan carrying a Russian flag featuring Vladimir Putin's face following his son's quarter-final win.
Djokovic climbed to his player's box after the win to embrace his mother and broke down in uncontrollable tears, collapsing to the ground sobbing.
It capped a remarkable comeback by the 35-year-old fourth seed, who missed last year's tournament when he was deported over his Covid vaccination stance.
"I have to say this has been one of the most challenging tournaments I've ever played considering the circumstances, not playing last year, coming back this year," he said, wearing a jacket with 22 emblazoned on it.
"I want to thank all the people that made me feel welcome, comfortable, to be in Melbourne.
"I try to pinch myself and really live through these moments, it's a long journey," added Djokovic, who was more emotional than usual.
"Only my team and family know what we have been through in the last four or five weeks and this is why I'd probably say this is the biggest victory in my life considering the circumstances."
After a three-year ban from Australia was lifted, Djokovic won the lead-up Adelaide International before reinforcing his stature as an all-time great in Melbourne.
The emphatic win drew him level with Nadal on a record 22 Slams, two clear of Roger Federer.
The Spanish great made a shock second-round exit with a hip injury, but is targeting a return for the clay-court season and another crack at the French Open, and with it a 23rd Slam title.
Nadal, though, is set to slide down the rankings when they are released on Monday, in contrast to Djokovic, who will dethrone Spanish teenager Carlos Alcaraz and return to the top for the first time since June. Tsitsipas will climb one place to third.
Both men were back on a court that helped them rise to stardom.
Djokovic won his first Grand Slam in 2008 on Rod Laver Arena while Tsitsipas burst on the scene in 2019 when he stunned defending champion Federer in the last 16.
With sizeable Greek and Serbian communities in Melbourne, and Rod Laver in attendance, there was a raucous atmosphere.
Djokovic came into the match with his confidence high having won all nine of his previous Australian Open finals and with a 10-2 career advantage over the Greek.
Moving freely with only minimal strapping on his troublesome left hamstring, he opened with a comfortable hold after being greeted by huge cheers.
Djokovic worked two break points on Tsitsipas's opening serve, to no avail, but kept probing and the Greek handed him a break for 3-1 with a careless double fault.
Tsitsipas, in only his second Grand Slam final to Djokovic's 33rd, appeared nervous, losing the first set in just 36 minutes.
But he battled back into contention in a much closer second set as his confidence grew, improving his serve and winning some pressure points.
He earned his first break point - and set point - when Djokovic blasted a backhand wide.
But the Serb clung on to keep the set on serve and it went to a tiebreak, where his greater experience came to the fore.
Against the odds, Tsitsipas broke for the first time on Djokovic's opening serve in set three, only to relinquish the advantage immediately after a gripping rally, furious with himself.
It again went to a tiebreak, where Djokovic once again raised a level to claim another title.
"I've had the privilege to play a lot of difficult, high-intensity matches, but I would like to say one more time Novak brings the best out in me," said Tsitsipas, who is still yet to win a major.
"He's the greatest that has ever held a tennis racket, for sure.
"I don't think there's any reason for me to be affected by today's loss," he added.
"It is a step forward. I'm looking forward to scoring more points during this season, making bigger results, fighting for bigger trophies."
