Holebas had been sent off during a Premier League match against West Ham United for denying a clear goal-scoring opportunity but has now seen that decision overturned.
A spokesperson for the FA wrote in a statement:
“An Independent Regulatory Commission has today [13/05/2019] upheld a claim of wrongful dismissal regarding José Holebas.
“The Watford player was sent off against West Ham United in the Premier League on Sunday [12/05/2019] for denying an obvious goal scoring opportunity.”
The defender was given his marching orders after tugging back the Hammers' Michail Antonio in the 48th minute after the winger had managed to get behind the Hornets defence.
It was a crucial moment in the contest, coming just minutes after Gerard Deulofeu had cut West Ham's lead to 2-1, getting his side back into the game.
The Hornets would concede twice more after Holebas' dismissal as Marko Arnautovic put the game out of reach in the 71st minute and Mark Noble capped the scoring seven minutes later from the spot after Antonio was taken down in the area.
The defeat saw Watford slip out of the top half of the table, finishing 11th, two points behind Leicester and West Ham in ninth and 10th respectively.
However, despite a three-game losing streak and four-game winless run to close out the season, the Hornets still achieved their best league finish since 1986-87.
Watford boss Javi Garcia had expressed frustration with the Holebas red card post-match, telling reporters: "We will appeal the red card. It made it impossible for us and for a player to miss the FA Cup final based on that contact is not right."
The FA have agreed with Garcia's assessment and Holebas, who started 27 of Watford's 38 Premier League games this season, is now free to suit up for the squad against Manchester City.
The Hornets will be looking to book their place in Europe with the victory, as well as denying City a domestic treble.