The Team Dimension Data rider, 33, timed his push perfectly on the final climbs of the 194.5km stage from Bradford to Fox Valley near Sheffield.
Pauwels' team-mate Omar Fraile finished second and Britain's Tao Geoghegan-Hart, riding for Team Sky, was fifth.
Nacer Bouhanni, Saturday's stage winner, was taken to hospital after being knocked unconscious in a crash.
Pauwels attacked at the top of the Cote de Wigtwizzle, with 22km remaining, then eked out a 30-second lead on the Cote de Ewden Height.
The chasing pack narrowed that advantage to nine seconds by the summit of the final climb out of Midhopestones but Pauwels eased clear again to claim victory.
"It feels a bit strange," Pauwels said. "It is the first time I have had my hands in the air.
"But I think people would not really be surprised that I take a win because I have been quite close.
"Last year I was second, third, fourth, everything except a win, and now I get two wins at the same time which makes it more special."
Men's Tour de Yorkshire, stage three result:
1. Serge Pauwels (Bel/Team Dimension Data) 4hrs 57mins 47secs
2. Omar Fraile (Spa/Team Dimension Data) Same time
3. Jonathan Hivert (Fra/Direct Energie) +6secs
4. Brent Bookwalter (US/BMC) Same time
5. Tao Geoghegan Hart (GB/Team Sky) +8secs
Men's Tour de Yorkshire, final classification:
1. Serge Pauwels (Bel/Team Dimension Data) 11 hrs 53mins 4secs
2. Omar Fraile (Spa/Team Dimension Data) +6secs
3. Jonathan Hivert (Fra/Direct Energie) +7secs
4. Brent Bookwalter (US/BMC) +18secs
5. Matthew Holmes (GB/Madison Genesis )+20secs

The wasp takes its name from the dark creatures in JK Rowling's stories, because it paralyses its prey with venom before sucking its life away.
Nature charity the WWF says a total of 139 new species have been found in the South East Asia area in the past year.
There are 90 plants, 23 reptiles, 16 amphibians, 9 fish and 1 mammal.
The Mekong delta, which covers the countries of Cambodia, Laos, Burma, Thailand and Vietnam, is one of the world's richest and diverse wildlife regions.
A total of 2,216 new species have been discovered in the region in the past 17 years: that's about three every week.
Now conservationists believe it's a race against the clock to document all of them, as they say threats to their habitat could mean species go extinct before they're even discovered.
The colour changing thorny frog has a distinctive spiny back. At night its spikes have a pink and yellow colour; but in the daytime the yellow turns into a darker brown.
The wolf snake (above) is very well camouflaged, it has large non-venomous teeth on both jaws and blends well into its mountain forest home.
The crocodile newt lives around ponds and shaded places. Scientists have known about it for a long time but it's only recently been confirmed as a new species.
The name of this stick insect is nearly as long as its body. The Phryganistria heusii yentuensis is the second-longest insect in the world at 54cm long - that's over half a metre! But even this is shorter than the biggest ever, discovered in Borneo: Phobaeticus chani is more than 56cm long.
This bent-toed gecko is the 10,000th reptile recorded on Earth. It's one of 16 species of bent-toed geckos found last year, which puts the total at a huge 197 different species.
Belgian Serge Pauwels claimed his first career win in the Tour de Yorkshire after winning Sunday's final stage.
[NEXT_CONCEPT]
The Ampulex "Dementor" wasp - named after the soul-sucking Harry Potter monsters - is just one of many new species discovered in Greater Mekong.