The 24-year-old will replace fellow countryman Mark Webber who is leaving Formula One to race for Porsche's Le Mans programme.
“Since joining F1 in 2011, I hoped this would happen and over time the belief in me has grown; I had some good results and Red Bull has decided that this is it, so it's a good time,” he told the official team website.
“Next year I’ll be with a Championship-winning team, arguably the best team, and will be expected to deliver.”
The destiny of the Red Bull seat has been the focus of Formula 1 for weeks, with Ricciardo heading off tough opposition from Kimi Raikkonen for the prized drive.
Although he had been widely expected to get the drive ever since Raikkonen's management revealed last month that talks with the team had broken down, Red Bull still delayed announcing its decision.
Team principal Christian Horner had suggested that the team wanted to know what other options were on offer - which included Raikkonen and an outside possibility of Fernando Alonso.
Although suggesting in Belgium that an announcement may not happen until after this weekend's Italian Grand Prix, Red Bull has elected to confirm its plans now.
Ricciardo will make the jump up to Red Bull after two full seasons with Toro Rosso, and a half campaign for the HRT team in 2011.
Horner said: “He’s a very talented youngster, he’s committed, he’s got a great attitude and in the end it was a very logical choice for us to choose Daniel.”
“Daniel knows what the team expects from him; he’ll learn quickly and it’s very much a medium to long term view that we’re taking in developing him.
“The seat within the team is a wonderful opportunity and I think he’s going to be a big star of the future.”
Red Bull's chief technical officer Adrian Newey added: "We could have taken an experienced driver, somebody guaranteed to deliver to a relatively known level, or equally we could take on a much younger driver in the hope that they'll develop to a very high level.
"We looked at the latter option and concluded that of the younger drivers, Daniel is the most promising.
"From Red Bull's point of view that also fits well because the driver that Christian and I feel is the most promising is part of the Red Bull young driver programme."