A sinusoidal phase modulation laser interferometer is proposed to detect water surface acoustic waves excited by underwater acoustic radiation, and an improved PGC-Arctan demodulation algorithm that combines prenormalization and Lissajous ellipse fitting is proposed to demodulate detection signals. In this paper, the effects of phase modulation depth, carrier phase delay, and interference signal visibility on the Lissajous figure formed by quadrature interference components are analyzed. The demodulation algorithm first uses the amplitudes of multiple Fourier spectral components of an interference signal to calculate the phase modulation depth C, and calculation of the carrier phase delay Vc is achieved through the introduction of a quadrature carrier signal. Then, certain coefficients regarding C and Vc are constructed for prenormalization of the two quadrature interference signal components to eliminate the local nonuniform widening phenomenon of Lissajous ellipse. Next, the outer and the inner contours are extracted from a uniformly widened Lissajous ellipse resulting from light intensity disturbance, and the axial ratio of the ellipse is obtained, which is used to correct the ratio of the quadrature interference signal to eliminate the effect of filter gain coefficients. At last, through the combination of an Arctan algorithm and a phase-unwrapping algorithm, high-precision demodulation of the interference signal is realized. A sinusoidal phase modulation interferometer was set up to detect water surface acoustic waves, and a series of detection experiments were carried out. The experiment results show that the detection method and demodulation algorithm described in this paper can accurately realize the measurement of weak water surface acoustic waves. The proposed algorithm shows less distortion in demodulation results, and its signal-to-noise distortion ratio is less than 20 dB at 500 Hz, which is significantly better than traditional algorithms. The experimental results demonstrate the effectiveness and accuracy of water surface acoustic wave detection using sinusoidal phase modulation interferometer.