Oosthuizen trailed by one shot going into the final two holes but birdied them both to finish one shot clear of 2012 winner Grace, as he once again started the new year by winning the European Tour's "˜tournament of champions', following his victory by the same margin 12 months ago.
Grace had carded a closing 68 in the group ahead of his compatriot to set the clubhouse target of 11 under par and then watched as former Open Champion Oosthuizen holed from two feet on the 17th and then chipped to the same distance for another birdie on the short par four 18th.
That meant Oosthuizen also signed for a round of 68, but that was enough for a 12 under par winning total of 276 and his seventh European Tour title, four of which have been on home soil.
"It's great to start the year with a win again," he said. "It feels really good and hopefully I can defend next year. Volvo is an unbelievable company, with what they do for golf on The European Tour and worldwide, so to defend the Volvo Golf Champions tournament is special, and hopefully I can go three in a row.
"It looks like proper rest, with no golf, is the key for me. It doesn't work all of the time, but it has for the last few years."
Oosthuizen, whose 2013 season was hampered by a back injury, had started the day two strokes behind overnight leader Tommy Fleetwood, and had a slow start to his final round, carding seven consecutive pars before sinking a 12 foot eagle putt on the eighth hole.
He then dropped a shot on the tenth before back-to-back birdies on the 13 and 14th holes pushed him into a share of the lead with Grace, who had posted a hat-trick of birdies from the sixth hole before his only bogey of the day on the 15th hole.
Grace's birdie on the 16th, which Oosthuizen bogeyed, meant it was Grace who temporarily held the advantage, but Oosthuizen dug deep and produced the two closing birdies when it mattered most to retain his title.
"I knew Branden was going to make a charge and I saw him up there early. I really thought that you're going to see the South Africans coming through today, and Joost Luiten played really well but just missed a few putts. He's a good player but Branden was the one that really spurred me on to finish well."
Grace will rue his opening round 74 and some missed chances during his final round as he fell just short in his bid for a fifth European Tour victory, having won the title two years ago when he defeated fellow countrymen Ernie Els and Retief Goosen in a play-off at Fancourt.
"I let a couple slip out there which was unfortunate, but it was a good start to the year," he said. "If you told me my first event, I'd start off with a second place, and coming this close, I would have taken it. So I'm very pleased. The winner at the end of this week is going to be the true champion, and Louis played well, so he deserves it."
Englishman Fleetwood, who took a one stroke lead into the final round, carded a level par round of 72 to share third position on ten under par with Dutchman Luiten, who had a 71. Three-time Major Champion Padraig Harrington closed with a round of 67 to finish a shot further back in a share of fifth position, alongside French pair Victor Dubuisson (72) and RaphaÃƒÂ«l Jacquelin.
Brett Rumford had a good week when he finished in a share of 10th.
Leading scores from the Volvo Golf Champions at Durban Country Club (par 72)
276 L Oosthuizen (RSA) 68 69 71 68,
277 B Grace (RSA) 74 67 68 68,
278 J Luiten (Ned) 70 67 70 71, T Fleetwood (Eng) 70 67 69 72,
279 R Jacquelin (Fra) 67 73 70 69, V Dubuisson (Fra) 69 69 69 72, P Harrington (Irl) 71 71 70 67,
281 T Aiken (RSA) 72 72 70 67, J Quesne (Fra) 74 73 66 68,
283 M Manassero (Ita) 72 67 73 71, B Rumford (Aus) 73 70 68 72, T BjÃƒÂ¶rn (Den) 79 68 67 69,
284 J Donaldson (Wal) 71 71 68 74, M Madsen (Den) 71 74 69 70,
285 C Schwartzel (RSA) 74 69 68 74, M Siem (Ger) 70 71 72 72, M JimÃƒÂ©nez (Esp) 76 70 67 72