Originally described by J. F. Gmelin in an edition of Systema naturae in 1788 as Psittacus novaehollandiae, and after by Scottish writer and naturalist Robert Kerr in 1792 as Psittacus hollandicus, and finally moved to its own genus, Nymphicus, by Wagler in 1832. Its genus name reflects the experience of one of the earliest groups of Europeans to see the birds in their native habitat; the travellers thought the birds were so beautiful that they named them after mythical nymphs. The specific name hollandicus refers to New Holland, a historical name for Australia.

Its biological relationships were for a long time uncertain; it is now placed in a monotypic subfamily Nymphicinae, but was sometimes in the past classified among the Platycercinae, the broad-tailed parrots. This issue was settled with molecular studies. A 1984 study of protein allozymes signalled its closer relationship to cockatoos than to other parrots,^[13] and mitochondrial 12S rRNA sequence data places it among the Calyptorhynchinae (dark cockatoos) subfamily. The unique, parakeet (meaning long-tailed parrot) morphological feature is a consequence of the decrease in size and accompanying change of ecological niche.

Sequence analysis of intron 7 of the nuclear β-fibrinogen gene, on the other hand, indicates that it may yet be distinct enough as to warrant recognition of the Nymphicinae rather than inclusion of the genus in the Calyptorhynchinae.

The cockatiel is now biologically classified as a genuine member of Cacatuidae on account of sharing all of the cockatoo family's biological features, namely, the erectile crest, a gallbladder, powder down, suppressed cloudy-layer (which precludes the display of blue and green structural colours), and facial feathers covering the sides of the beak, all of which are rarely found outside the family Cacatuidae. This biological relation to other cockatoos is further supported by the existence of at least one documented case of a successful hybrid between a cockatiel and a galah, another cockatoo species.

Cockatiels are native to Australia, where they are found largely in arid or semi-arid country but always close to water. Largely nomadic, the species will move to where food and water is available. They are typically seen in pairs or small flocks.Sometimes, hundreds will flock around a single body of water. Wild cockatiels typically eat seeds, particularly Acacia, wheat, sunflower and Sorghum. To many farmers' dismay, they often eat cultivated crops. Cockatiels may be observed in and around western New South Wales and Queensland, Alice Springs, The Kimberley region and the northwestern corner of Western Australia. They are absent from the most fertile southwest and southeast corners of the country, the deepest Western Australian deserts, and Cape York Peninsula.

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