The Lifetime Achievement Award will be posthumously presented to Costello during the ceremony in Auckland.
Costello died in Australia last year after a long battle with cancer.
Meanwhile, the Pacific Music Awards Trust says the live ceremony will not take place on Wednesday as planned due to the Covid-19 restrictions.
Instead, the event will be shared as an online presentation on Saturday 3 October.
In a statement, the Pacific Music Awards Trust said it was proud to announce that the Manukau Institute of Technology Lifetime Achievement Award would go to the "Fijian guitarist who captured the hearts of listeners globally".
The Trust said Costello's "legacy in music had captured many hearts across the Pacific and the world, with strong influences by the Caribbean sound.
It said the Lautoka native also left behind a legacy of Pacific achievement, having travelled and performed in over 20 countries, recorded over 30 albums and played over 4,000 gigs.
The trust said Costello had inspired a generation of young musicians to pursue their dreams.
"He released 30 albums throughout a long, influential career with his debut album Tropical Sunset released in 1979.
"While his debut album didn't see widespread success, a year later he struck gold with his second album Lania, which was hugely popular with audiences in Fiji and around the Pacific.
"From there, he quickly became known for his excellent live performances. Lania reached #1 in Fiji and across the Pacific and kick-started Daniel's music career.
The Trust said Costello had recorded with many Pacific music legends like Tui Ravai, Paul Stevens, Vili Tuilaucala, Saimoni Waqa, DJ Spooky, and Irene Taylor, Annie Kumar and Lela .
Costello moved to Australia a few years later because of the 1987 Fiji coups where he wrote two songs Samba and Take Me To The Island, before returning to Fiji and starting his own studio and production suite called Tango Sound Productions.
"It was here he recorded his first big hit album, Samba which went on to sell more than 300,000 units in 1990-1993, proving to Daniel and the wider Pacific community it was possible to make a living solely from music alone in the Islands."
Costello is survived by his wife Corrina Gibson-Costello and their five children.
Special tribute to be performed
A special tribute to Costello during the awards will be performed by well-known Fijian artist and close friend Stevie Heatley supported by TCB, which was Daniel's touring band for New Zealand and the Pacific from 2013-2015.
Meanwhile, the Trust said the will also be screened on TVNZ on 17 October.
The Awards will feature live performances by the new wave of Pacific artists including Church & AP, Lomez Brown, Lou'ana, Shepherds Reign, Lani Alo and Disciple Pati.
Trust chair Reverend Mua Strickson-Pua said given the current environment the move to hold the awards online was the their responsibility and the best decision for the awards.
"The 2020 Pacific Music Awards Online breaks new ground in the musical Malaga/journey of it being about our musicians our musika/music of Te Moana Nui-a-kiwa people of the Pacific Moana Oceania.
"But importantly it is about building up our people with musika of resilience and hope that's why it is you and us family, community and society together united kotahitanga unity - being that family of humanity for this time of moving into the unknown nga manaaki manuia blessings."