In a statement posted on his website, Mr Mundell said making the announcement was "one of the most important decisions of his life" and harder than standing for election or speaking in the Commons for a "man of his age".
He said he hoped that it would not change the way "people treat me" and that it should "make no difference whether you are a Cabinet Minister or in any other walk of life".
It makes him the first openly gay Conservative Cabinet Minister in history - Alan Duncan, who disclosed his sexuality in 2002, was never a cabinet minister.
There are now 33 openly gay MPs in Parliament, which, according to a study by US academics, is the highest proportion of any Parliament in the world.
A spokesman for David Cameron said: "The Prime Minister is delighted that he's in a position to take this step."
The statement from Mr Mundell, who has three grown-up children, said: "New Year, new start! I have already set out my political priorities for the year and now I am setting out my personal one.
"Having taken one of the most important decisions of my life and resolved to come out publicly as gay in 2016, I just want to get on with it, and now, just like that, I have said it. How can it be both so easy and so hard to say a few short words?
"In the end, it took just a couple of taps on a keyboard, yet at some points, in my mind, it was going to be harder than standing for election, speaking in the House of Commons or being cross-examined on television.
"I still cannot fully rationalise such feelings, but I know they are not uncommon, particularly in men of my age.
"Of course, everybody who gets to this point, has had their own journey. I have certainly been on mine - conflicting emotions, of doubts and fears, but ultimately positive and uplifting, with an unstoppable direction of travel.
"Over time, I came to understand that, for me, the only way to be truly happy on a personal level is to acknowledge in public as well as in private, who I am."
Mr Mundell, who is the only Scottish Conservative MP, went on to say he "couldn't have had more love and support from my family and friends".
One of his sons, Oliver, tweeted: "I admire my dad as much today as I did yesterday. Brave decision to go public and the right one."
Leader of the Scottish Conservative Party Ruth Davidson, who is also gay, said: "I know that David didn't make today's statement lightly but approached it in his typically thoughtful and positive manner.
"He has my wholehearted support, as well as the support of the wider Scottish Conservative family."
Labour MP Wes Streeting tweeted: "Still not as easy as it should be, but a lot easier than it once was."
Scotland's First Minister Nicola Sturgeon tweeted her support to Mr Mundell, saying: "Good on you, David. Well done and best wishes."
Responding to Ms Sturgeon's message, Mr Mundell said he had been "overwhelmed and humbled" by the "love and support across the political divide".
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