Watson has been with the Royals since the inaugural season in 2008. Former captain Rahul Dravid, who retired from all forms of cricket in 2013, will be involved in all aspects of cricket strategy -- mentoring the team and guide youth and talent development initiatives for the franchise.
Watson's strong performances helped the team win the inaugural IPL under the leadership of Shane Warne. The Australian displayed all-round skills and match-winning performances in crucial ties and was adjudged the player of the tournament.
The Queenslander scored his first IPL century in 2013 against the Chennai Super Kings at the M.A. Chidambaram Stadium. His strong performances took the team to the play-offs and Watson won his second player of the tournament award.
"I would like to congratulate Shane Watson on his appointment as the captain of the Royals. He is not only one of the world's best all-rounders but a leader par excellence," said former India captain Dravid.
"Watson has been with the team since the first season and is familiar with the players and the staff. The Royals squad is a bunch of extremely energetic and talented players who know their roles perfectly well and they will thrive under Watson's inspiring leadership."
Watson said he was honoured to be given the position.
"I am honoured to lead the Rajasthan Royals, an extraordinary team which has always given me amazing opportunities. Shane Warne and Rahul Dravid had a lot of faith in me while they were captains and gave me opportunities that helped improve my cricket. I hope to live up to the confidence shown in me by the franchise and give our fans an exciting season of cricket," said the 32-year-old.
"I would like to thank our fans for showing trust in me through their votes on the digital medium. The Royals are one big family and I feel very privileged to be a part of such a special franchise. My aim will be to continue playing our best cricket and maintain the winning momentum. We all want to repeat the 2008 IPL success and last season, we were quite close to that. I am confident that we can do it again."
The Aussie was bestowed with the 2010 Allan Border Medal and again in 2011 by Cricket Australia (CA), becoming the second player after Ricky Ponting, to win back-to-back Allan Border Medals.
Watson was declared player of the tournament in the 2012 ICC World Twenty20 for scoring a total of 249 runs with an average of 49.80 while taking 11 wickets with the ball.
Since he joined Royals, Watson has been the team's best all-rounder, notching 1,785 runs in 55 matches, scoring one century and 11 half-centuries at a strike rate of 145.59. In bowling, he claimed 48 wickets with best figures of 3/10.
For the 2014 season, Royals retained Watson, Ajinkya Rahane, James Faulkner, Stuart Binny and Sanju Samson before the fresh auction.