Mugabe led the nation to independence, ending the apartheid colony state of Rhodesia, and ruled for 37 years.
The former vice president had previously fled to South Africa two weeks ago when the country fell into turmoil but returned on Wednesday to assume his duty as president.
Other African leaders were in attendance to witness the historic moment.
Opposition leaders, who accused Mugabe and his colleagues of being corrupt and autocratic, have called on the new president to halt the "culture of corruption."
Mnangagwa is a member of the ruling Zanu-PF party which ruled the country since its independence in 1980.
Former president Mugabe was not in attendance during the event which has raised flags for outside observers, though Mugabe "expressed his good wishes and support for the incoming president," according to the Herald newspaper.
Mugabe, as part of his resignation deal, was offered immunity and local media reports that the independence leader has been guaranteed "maximum security and welfare."
The former president, now 93 years old, was forced to resign after the country’s army seized key state assets, including state media, and established control over Harare, pressuring Mugabe to step down in a peaceful transition.
The plan had apparently been in place for quite some time between the military and opposition, according to statements by military officials.
Before this dramatic move, articles of impeachment had been brought before Mugabe who later stepped down peacefully in a resignation statement read before parliament, insisting that his resignation was voluntary.
"As MDC, we are saying, after so many years of Zanu-PF misrule, the first thing that needs to be transformed is the culture. The culture of violence, the culture of corruption. We need to change that culture," said MDC leader Morgan Tsvangirai, a key opposition leader.
Western pundits are optimistic that the new president may liberalize Zimbabwe’s economy.
The International Monetary Fund (IMF) has insisted that the African country access international aid, which would likely include structural readjustments that would end reforms won under the rule of Mugabe.
It is unclear if the ruling party will continue in a unitary rule or if a coalition that includes the opposition will be established.
Sources say that Zimbabwe’s Robert Mugabe, who has recently resigned from his post as president, will receive immunity and a guarantee of safety as part of a deal that led to his resignation.
“It was very emotional for him and he was forceful about it,” said the source.
“For him it was very important that he be guaranteed security to stay in the country...although that will not stop him from traveling abroad when he wants to or has to,” the source continued.
Mugabe, 93, who led Zimbabwe’s independence in 1980, putting an end to an apartheid colonial rule, was forced to step down as president when the nation’s army seized control of the capital, Harare.
- Countries: Africa