This is the biggest change in the rankings table with India dropping 10 points, currently sitting on 102.
India's 2010-11 victories against Australia, New Zealand and West Indies (away) as well as a drawn series against South Africa no longer count in the rankings. Similarly, their 2011-12 victory against the West Indies and 2012-13 victories against New Zealand and Australia are now weighted at 50 percent.
India have been overtaken by England and Pakistan who are ranked third and fourth respectively.
Meanwhile, Australia have reclaimed the No.1 position and have also retained the top spot in the One-Day International (ODI) rankings. This is the first time since Dec 2008 that Australia are ranked No.1 in both Tests and ODIs at the same time. They last held the No.1 Test ranking in Aug 2009, before being displaced after losing 1-2 to England.
Australia have edged ahead of South Africa, which had held the top spot since Aug 2012. They gained eight points to move up from 115 to 123 while South Africa dropped from 127 to be level on 123, with Australia ahead by a fraction of a point.
The results from 2010-11 have been dropped from calculation while the results from 2012-13 are now reduced to a weighting of 50 percent. In 2010-11, Australia lost to India (0-2) and England (1-3) while they suffered a 0-4 defeat in India in 2012-13.
"We are incredibly proud to be the No.1 team in the world in both Tests and ODIs which are two of the team's most important goals. There has been an enormous amount of hard work and effort on and off the field that has led to this result," said Australia captain Michael Clarke.
"However, the true test of a great side is sustained success and now our goal is to maintain these rankings and continue to play great cricket as we lead into challenging Test series' against Pakistan and India and the World Cup at home."
Looking back at the past season, Clarke said: "We had a fantastic home summer against England and a great series win away against South Africa earlier this year. But the challenge now is to continue that form."
Since the ranking system was introduced in 2003, Australia have been No.1 in Tests for 74 months, more than any other side. South Africa is a distant second with 23 months.
There has been little change to the ODI rankings despite the top three sides -Australia, India and Sri Lanka - dropping points.
"We congratulate Australia for once again topping the Test table, a deserved reward for some exciting and consistent cricket played both home and away, particularly over the last nine months," said ICC chief executive David Richardson.