Aiming at the problem of the control performance degradation of a permanent magnet synchronous motor (PMSM) drive system due to permanent magnet demagnetization, which is caused by mechanical vibration and high temperature, this paper presents an equivalent-input-disturbance (EID) fault-tolerant control method based on an integral sliding-mode observer (ISMO). The mathematical model of a PMSM with demagnetization fault in dq-axis coordinate system is first established. Then, the model is transformed into an EID system one. An ISMO is used to estimate the state variables of the EID system and an equivalent-input-demagnetization fault. The estimate of the equivalent-input-demagnetization fault is compensated in a feed-forward manner. Thus, the fault-tolerance control of PMSM demagnetization is achieved. Finally, the stability analyses of the ISMO and the entire EID system are given. The comparative results of a hardware-in-the-loop experiment show that the designed method effectively improves the fault-tolerant control performance of a PMSM drive system with demagnetization fault.