The clash is a repeat of the Championship play-off final of 2013, which Palace won with a Kevin Phillips penalty.
Watford were last in the final in 1984, where they were beaten by Everton, while Palace lost the 1990 final to Manchester United after a replay.
Everton will face the winners of the replay between Manchester United and West Ham in the second semi-final.
The Hammers, cup winners in 1980, drew 1-1 at Old Trafford on Sunday.
The ties will be played at Wembley over the weekend of April 23 and 24.
Source: PA