In a letter published on Sunday morning, Mr Sunak told Mr Zahawi that he would remove him from his position in Government, following the conclusion of an ethics inquiry into the former chancellor's tax affairs.
Mr Zahawi was reported to have settled an estimated £4.8 million bill with HM Revenue & Customs while he was chancellor - including paying a penalty - sparking calls for him to step down before the investigation, by Sir Laurie Magnus, the Prime Minister's independent adviser on ministers' interests, had been concluded.
Mr Sunak, who appointed Mr Zahawi to the role last October, resisted calls to sack his party colleague immediately and instead stressed the need for "due process".
Now, the SNP has warned that Mr Sunak “still has questions to answer” over what he knew about the settlement when he appointed Mr Zahawi into a senior role.
SNP Cabinet Office spokesperson Kirsty Blackman said: "Nadhim Zahawi should have been sacked well before now, but it has only been Rishi Sunak's dithering and indecision that has kept him in post.
"The Prime Minister shouldn't have needed an ethics adviser to tell him that a sitting Chancellor should not be in a tax dispute about millions of pounds of unpaid taxes."
She added: "Sunak still has questions to answer over this whole affair about what he knew about the settlement and what advice he received about Zahawi's tax on his appointment.
"The UK government is riddled with sleaze and scandal and the only way Scotland can escape is by becoming an independent country."
Labour shadow education secretary Bridget Phillipson said the Prime Minister should have sacked Mr Zahawi a "long time ago".
"It's vital that we now get answers to what Rishi Sunak knew and when did he know it,” she said/ “We need to see all the papers, not just have the Prime Minister's role in this brushed under the carpet."
The Liberal Democrats also called on Mr Zahawi to go a step further and leave parliament.
In the letter to Mr Zahawi, Mr Sunak said the breach was serious enough for him to be sacked.
"Following the completion of the Independent Adviser's investigation - the findings of which he has shared with us both - it is clear that there has been a serious breach of the Ministerial Code,” he wrote.
"As a result, I have informed you of my decision to remove you from your position in His Majesty's Government.
He added: "When I became Prime Minister last year, I pledged that the Government I lead would have integrity, professionalism and accountability at every level."
He paid tribute to Mr Zahawi's contribution to the Government, including his role as vaccines minister during the pandemic.
"As you leave, you should be extremely proud of your wide-ranging achievements in Government over the last five years,” he said.
In his reply to the Prime Minister, Mr Zahawi, a Kurdish-born Iraqi refugee, who arrived in Britain aged 11 unable to speak English, did not explicitly refer to the findings of the inquiry, but apologised to his family for the “toll” the situation had taken on them.
The row surrounding Mr Zahawi had centred on a tax bill over the sale of shares in YouGov - the polling firm he founded with fellow Conservative Stephan Shakespeare - worth an estimated £27 million and which were held by Balshore Investments, a company registered offshore in Gibraltar and linked to Mr Zahawi's family.
Mr Zahawi, who has been MP for Stratford-upon-Avon since 2010, had said that HMRC concluded there had been a "careless and not deliberate" error in the way the founders' shares, which he had allocated to his father, had been treated. He agreed a settlement
He had also insisted he was "confident" he had "acted properly throughout".
On Sunday, he told Mr Sunak that he was concerned "about the conduct from some of the fourth estate in recent weeks", in a reference to the media.
He said: "It has been, after being blessed with my loving family, the privilege of my life to serve in successive governments and make what I believe to have been a tangible difference to the country I love."
In comments which appear to indicate that the former chancellor holds out little prospect of returning to office in the years to come, he added: "You can be assured of my support from the backbenches in the coming years. Your five priorities are the right priorities, and I will do whatever I can to help you deliver them."
Sir Laurie's four-page report, dated 29 January, said the technical details of the HMRC investigation were outside his scope.
Instead, he considered Mr Zahawi's "handling of the matter in light of his responsibilities as a Minister".
In that regard, he found that the Tory chairman had shown "insufficient regard for the general principles of the Ministerial Code and the requirements in particular, under the seven Principles of Public Life, to be honest, open and an exemplary leader through his own behaviour".
Among the findings, he notes "omissions" from Mr Zahawi that amount to a "serious failure" to meet the standards of the Ministerial Code.
He said: "In the appointments process for the governments formed in September 2022 and October 2022, Mr Zahawi failed to disclose relevant information - in this case the nature of the investigation and its outcome in a penalty - at the time of his appointment, including to Cabinet Office officials who support that process.
"Without knowledge of that information, the Cabinet Office was not in a position to inform the appointing Prime Minister."
The sacking came as Levelling Up Secretary Michael Gove toured broadcast studios on behalf of the Government.
"Because someone commits a lapse or a sin, that shouldn't be automatically taken as an opportunity to damn an entire organisation or a way of working," he said as news of Mr Zahawi's dismissal broke.
"There are always people who will fall short, whether it's in politics or other parts of public life, or professional life, or in any area."
He added that he did not believe Mr Zahawi should quit as an MP.
Mr Sunak is unlikely to appoint a new Conservative chairman immediately and Stephen Massey, the party's chief executive, will step in as interim chair.