Water supplies will be cut off entirely for two days each week, on a rotating basis, in several northern cities.
The shortage is due to reduced rainfall, leaving water levels in reservoirs far below capacity.
But a leaky delivery system, silt build-up in reservoirs and wastage are also being blamed.
Late last month, the government said the dry spell was forecast to continue.
“The water supply situation is urgent as Taiwan had the lowest rainfall last autumn and winter since 1947,” the economics affairs ministry said.
“We may have delayed or no monsoon rains at all… We urge the public to co-operate during this difficult time.”
The rationing is affecting New Taipei City, neighbouring Taoyuan City and Hsinchu County all in the north of the island. New Taipei surrounds the capital, Taipei, which remains unaffected.
Local media said the water level in Shihmen Reservoir, which supplies the northern area, was now at 24.56% of capacity, the lowest since it became operational in 1964.
Residents in affected areas have been advised to store water in advance to use for cooking, washing or flushing toilets.
Some 1,400 industrial users, including chemical and electronic components makers, are also affected. Some restrictions on water supply to industrial users have also been in place since last month.
But so far, production has not been affected because they either have stored supply in their own water towers, or have adjusted their manufacturing schedule, reports the BBC’s Cindy Sui in Taipei.
Our correspondent says the water crisis is a wake-up call for Taiwan, where the cost of water is among the lowest in the world.
That has led to widespread wasting. The island’s pipes are also decades old, leading to hundreds of millions of tonnes of water leaking each year.
Silt build-up in the reservoirs has also prevented more water being stored when there is rain.
The island’s current and previous governments, and the state-owned water company, are being criticised for not doing enough to deal with this problem earlier, our correspondent adds.
The government is now offering incentives to promote conservation, including discounts for reduced use and subsidies for installing water-saving taps or toilets.
However, critics say water rates should rise to discourage wasting, but with presidential and legislative elections coming up next year, raising fees is something politicians dread.