Prime Minister John Key says the Maori tino rangatiratanga flag represents potential and hope and should not be seen just as a protest flag.
The black, red and white flag will fly from the Auckland harbour bridge, Premier House and other official sites on Waitangi Day.
Critics, including Monarchy New Zealand, describe the decision as potentially divisive.
Mr Key told Morning Report that flying two flags is a symbol of unity and improving race relations.
He said it also recognises Maori and the Crown came together on 6 February, 1840, to sign the Treaty of Waitangi.
The Labour Party says the decision is a hollow gesture. Labour MP Shane Jones says the decision will make little difference to people's lives.
He doubts it will establish any virtue about the symbolism around Waitangi Day.
Labour also says the decision was inevitable because it is the flag of the Maori Party.
Even though the flag will hold no official status, Maori Party co-leader Pita Sharples says it still holds status for Maori.
He says 80% of the 1200-plus public submissions on the issue supported the tino rangatiratanga flag.
Dr Sharples says the announcement shows the Government is respecting that decision.
Monarchy New Zealand says flying any flag alongside the New Zealand one on Waitingi Day is potentially very divisive.
And Nga Puhi elder Kingi Taurua says the 1835 United Tribes flag, bearing four white stars and Saint George's Crosses should have been chosen.
Mr Key acknowledged that those in the far north feel the United Tribes flag should have been chosen.
Historian Paul Moon says the flag is only symbolic and when it comes to substantial issues most of the country will continue to be united under the New Zealand flag.
However, Professor Moon says the meaning of the chosen flag is vague.