The inauguration, which was attended by foreign dignitaries including US Secretary of State John Kerry and Australian Prime Minister Tony Abbott, capped a remarkable rise for a soft-spoken politician who was brought up in a riverside slum.
Widodo, known by his nickname Jokowi, worked his way up through local politics before securing the presidency in July following a close race against controversial ex-general Prabowo Subianto.
He is the country's first president from outside an ageing band of political and military figures who have ruled the world's third-biggest democracy since the end of the three-decade Suharto rule in 1998.
But fears are growing that a hostile parliament dominated by parties that opposed Widodo at the election, and the new leader's status as a novice in national politics, could make it impossible for him to push through reforms aimed at reviving Southeast Asia's top economy and helping society's poorest.
At a ceremony in parliament, Widodo, wearing a black suit and traditional cap, stood for the national anthem alongside outgoing president Susilo Bambang Yudhoyono, before taking the oath.
"I swear that I will fulfil my obligation as the president of Indonesia as best as I can and as fairly as possible," he said.
Lawmakers and visiting dignitaries packed out the parliament for the ceremony, and there was applause when Prabowo walked in after speculation he would not attend, the latest sign of a thaw after weeks of political tensions.
Crowds had gathered across Jakarta to celebrate the inauguration of Widodo, a 53-year-old former furniture exporter who won legions of fans with his man of the people image during his time as Jakarta governor.
"I am proud of him. I don't mind spending money to travel here to watch this first-hand," said Sunti, who had travelled a long distance from her hometown for the inauguration.
After the ceremony, Widodo and his new vice president, Jusuf Kalla, will travel in a horse-drawn carriage accompanied by a parade to the presidential palace. In the evening the new leader, a heavy metal fan, is expected to join rock bands on stage at an outdoor concert. About 24,000 police and military personnel were deployed to secure the day's events.
A Critical Moment for Indonesia's Economy
But the euphoria of the inauguration is likely to be short-lived, analysts warn, as Widodo faces up to the task of leading the world's fourth most populous country, with 250 million people spread over more than 17,000 islands, at a critical moment.
Growth in Southeast Asia's top economy is at five-year lows, corruption remains rampant, and fears are mounting that support for the Islamic State group could spawn a new generation of radicals in the country.
Widodo has set out an ambitious reform agenda to tackle the country's many problems, but there is concern the notoriously fractious parliament could prove a hindrance.
However Prabowo's appearance at the inauguration was the second sign of easing tensions in just a few days after he unexpectedly met Widodo Friday for the first time since the election and pledged support, and raises hopes for the new leader's prospects.
In recent weeks, Prabowo's supporters in parliament had used their majority to abolish the direct election of local leaders, a move opposed by Widodo, and win key posts in the legislature.
But analysts cautioned it was too early to say if the reconciliation would last or help Widodo.
Widodo's first test will be to reduce the huge fuel subsidies that eat up about a fifth of the budget, a move economists say is urgently needed but which risks sparking large street protests. He is also expected to announce his new cabinet later in the week.
Kerry's attendance was in part aimed at seeking support from Southeast Asian nations in the fight against the Islamic State group, which has taken over vast swathes of Iraq and Syria.