Shia-dominated Iran and Sunni Muslim Saudi Arabia agreed to resume diplomatic relations and reopen their respective embassies following a China-brokered deal announced in March.
The long-time regional rivals severed ties in 2016 after Saudi diplomatic missions in Iran were attacked during protests over Riyadh's execution of Shia cleric Nimr al-Nimr.
"The embassy of Saudi Arabia in the Islamic Republic of Iran has officially commenced its activities" and has been operating since Sunday, the official news agency IRNA said, quoting an "informed source" at Iran's foreign ministry.
There has been no official confirmation from Riyadh on the move.
In June, Iran marked the reopening of its embassy in Riyadh with a flag-raising ceremony.
Iranian media had previously attributed the delay in reopening the Saudi embassy to the poor condition of the building which was damaged during the 2016 protests.
The reports said Saudi diplomats would work from a luxury hotel in the Iranian capital pending the completion of the works.
Since the March deal, Saudi Arabia has restored ties with Iranian ally Syria and ramped up a push for peace in Yemen, where it has for years led a military coalition against the Iran-backed Huthi forces.
Iran and Saudi Arabia have backed opposing sides in conflict zones across the Middle East for years.
Iran has in recent months been at odds with Saudi Arabia and Kuwait over the ownership of a disputed gas field.
Saudi Arabia and Kuwait claim "sole ownership" of the field, with Iran warning it would "pursue its right" to the offshore zone if negotiations fail.