Schlager becomes the first signing under manager Oliver Glasner, reuniting with his compatriot after a successful spell together at VfL Wolfsburg.
The 28-year-old made 30 appearances in all competitions last season, scoring three goals and serving as Leipzig's vice-captain.
Schlager started all four games for Austria at the World Cup and has 55 caps for his country.
"The club has big ambitions and so do I. I want to be back in European competitions and we have a good chance of achieving that. It is the best feeling to play international football during the week, and I want to experience that again," Schlager said in a statement.