The veteran opening batsman hurt his left shoulder while diving to stop the ball in Australia's innings, forcing him to immediately withdraw from the cricket action.
Later, he did not come out to bat in India's chase with KL Rahul chosen as the makeshift opener in his place.
Following India's emphatic win by a significant margin of seven wickets, Dhawan was spotted wearing a sling on his arm.
"Yes, he has been ruled out of the T20 series. A replacement will be announced soon," a BCCI official told PTI [Press Trust of India].
The 34-year-old's injury troubles have drastically affected his career over the past year.
His stint in the ICC World Cup last summer was cut short by a fractured thumb in the clash against Australia.
He then missed the entirety of India's limited-overs series at home against the West Indies due to a bruised knee.
The southpaw was able to recover in time for the Sri Lanka T20Is where he made his first half-century in the 20-over format in his last 15 appearances.
Although plagued by a lack of consistency in T20 cricket, Dhawan is a vital cog in India's ODI set-up and conjured two aggressive fifties in the first two matches against Australia.
India have plenty of options to choose from as the replacement for Dhawan given the context of the ongoing series between India A and New Zealand XI.
Sanju Samson, Prithvi Shaw, Mayank Agarwal and Shubman Gill have all emerged as the possible contenders to fill in for the vacant spot in the line-up.
The first of the five T20Is will commence on Friday in Auckland.