Croydon-born Hodgson took over from Frank De Boer in September following the Dutchman's sacking by Palace just four matches into the Premier League campaign.
The Eagles failed to pick up a point until the eighth game of the campaign, but former England boss Hodgson led an impressive escape act as Palace finished in 11th place.
Boyhood Palace fan Hodgson, who was a youth player with the south London club, will receive the honour "in recognition of his contribution to Croydon and to football".
"It is a great honour to be awarded the Freedom of the Borough," former Liverpool and Inter Milan manager Hodgson said.
"I could never have dreamt that my journey in life would take me from walking to Selhurst Park with my father and sitting on the crossbar at the Holmesdale Road End, to managing the club I have always supported and to being recognised by Croydon Council for my career in football."