The politician, who has served as chief minister four times before, was cheered by supporters as she travelled to the swearing-in ceremony in the state capital, Chennai (Madras).
A court sentenced Ms Jayalalitha to four years for corruption last year.
But an appeals court overruled this, allowing her to return to politics.
As she arrived at Madras University to take oath on Saturday, Ms Jayalalitha was cheered by a large crowd.
The colourful politician has been a leading figure in south Indian politics for three decades.
The former film actress enjoys enormous popularity in Tamil Nadu, where fans know her simply as "Amma" or mother.
Dressed in an emerald green sari, she took the oath in Tamil while her 28 cabinet ministers stood behind her.
Hundreds of supporters held up her photo and danced to the chant, "Amma is back".
Ms Jayalalitha's political return comes after she was convicted and sentenced for four years by a trial court last September.
She was found guilty of amassing unaccounted-for wealth of more than $10m (£6.4m) and had to quit as the chief minister.
The appeals court ruling earlier this month paved the way for her returning as the head of Tamil Nadu government.
On Friday morning, Tamil Nadu Governor K Rosaiah's office said in a statement that Mr O Panneerselvam, party leader and loyalist who headed the government in her absence, resigned along with his cabinet ministers.
The governor accepted the resignations and invited Ms Jayalalitha to form a government "at the earliest", the statement added.
Jayaram Jayalalitha has been sworn in as the chief minister of the Indian state Tamil Nadu, less than a fortnight after being cleared of corruption.