The politician, who died aged 70 in 2014, was a key figure in the Scottish independence movement, having served as an MP, MSP and deputy leader of the SNP.
Her husband Jim Sillars has gifted the painting by Scottish artist Gerard Burns to Holyrood.
Deputy Presiding Officer Christine Grahame revealed the work in the member’s room on Tuesday.
She said: “Having known Margo for many years, I am delighted that her dedication to the Parliament is being honoured with this portrait.
“Her sheer passion for politics and for the causes she championed will always remembered, as will her dynamic, colourful and compassionate nature.
“I count myself lucky to have known someone like Margo and to have worked so closely with her.
“This portrait is a way of showing future members and visitors to the Parliament just what she meant to us all.”
The portrait depicts Ms MacDonald, who suffered from Parkinson’s disease, inside the Parliament’s debating chamber, where she spent many years tackling issues including attempts to legalise assisted suicide for the terminally-ill.
Mr Sillars said: “In many ways Margo was a unique person and politician, and an inspiration to those who sought to advance the cause of Scotland.
“Our family is pleased that her portrait will be hung in the Parliament to whose life and development she contributed with a talent that was exceptional.”
Mr Burns, who has previously painted portraits of figures such as Billy Connolly, Ewan McGregor and First Minister Nicola Sturgeon, said he was “thrilled” when Mr Sillars asked him to paint Ms MacDonald.
He said: “I felt very honoured. I had always been a real fan.
“As a politician, Margo always struck me as having great clarity of judgement and real integrity. No-one ever put words into her mouth and she was her own person.
“It has been an absolute pleasure to work with the Sillars family on Margo’s portrait and it has been a real labour of love.”