The decision by King Carl XVI Gustaf means the children no longer have the title of royal highness and are not expected to perform official royal duties.
They will remain members of the royal family and retain their titles of dukes and duchesses.
The change has not affected the king's two grandchildren who are in direct line to the throne.
Observers say the move reflects a wider view that there is no need to pay so many members of the royal family for official duties.
The decision, announced in a statement published by the Royal Court of Sweden, regards the two sons of Prince Carl Philip and the three children of Princess Madeleine.
As well as relieving them of their royal duties, the change means that the children - aged between one and five - will not be entitled to receive the taxpayer-funded annual sum known as appanage which is given to members of the royal house.
Royal expert Roger Lundgren said the decision followed scrutiny over the increasing number of royals. "Parliament announced a few years ago that it would have a review of some principles regarding the monarchy. One thing was the size of the family," he said.
He said the king had taken action on his own to deal with the issue and compared the move to reports that the UK's Prince of Wales wanted to "streamline the Royal Family".
He also likened the new role of the five Swedish royals to that of princesses Beatrice and Eugenie, who have pursued their own careers.
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