The law had foreseen a cut of 300 euros ($334) in benefits — from the normal minimum of 863 euros — for those with insufficient German or English.
The court similarly found against a provision which curtailed payments to families the more children they had, saying it “disadvantaged families with multiple children in a way which is not objectively justifiable and unconstitutional”.
The cuts could lead to “the necessary living conditions for families with multiple children not being guaranteed”, the court said.
Church groups and anti-poverty groups had criticised the measures when the previous government put them forward last year.
That administration was a coalition of the centre-right People’s Party (OeVP) and far-right Freedom Party (FPOe), both of which had made a crackdown on immigration one of their key messages.
That government collapsed in May over a corruption scandal that engulfed the FPOe and led to new elections in September.
The OeVP is currently negotiating with the Greens to form a new coalition.
Tuesday’s decision comes only days after the constitutional court struck down another law passed by the OeVP-FPOe government, which would have enabled surveillance of encrypted messages.