Khagendra measured 2 ft 2.41 inches (67.08 cm) tall, nearly 2 inches shorter than his predecessor, Guinness World Records announced.
He snatched the coveted Guiness record from Colombia's Edward 'Nino' Hernandez.
On being announced the new shortest living man, Khagendra, who weighs 6.5 kg, said, "I don't consider myself to be a small man. I am a big man. I hope that having this title enables me to prove it and get a proper house for me and my family."
The news comes only five weeks after Guinness World Records recognised 'Nino' Hernandez as the record holder, which makes his reign the shortest in history.
According to Guinness World Records guidelines, candidates must be over 18 years of age to be considered an adult.
London-based Guinness World Records has sent an official adjudicator Marco Frigatti to the remote Baglung District of Pokhara, where Khagendra lives, to officially measure and recognise him as the new shortest living man.
The visit was timed to coincide with his 18th birthday.
Frigatti said: "We have known about Khagendra for some time, but have had to wait until he turned 18 before we could consider him for the record of shortest man.
"Khagendra has grown since his last measurement in February, but he is still shorter than Nino, making him the shortest known living man; and to make the announcement here in his hometown on the occasion of his birthday is extra special!"
The teen underwent a series of medical examinations over the past two days in his hometown of Pokhara to ascertain his height and weight.
A team of Guinness World Records recognised his height as 67.08 cms in a check-up at Phewa City Hospital this morning. The team had measured his height and confirmed it prior to handing him the certificate recognising him as the world's shortest man.
A businessman discovered Magar four years ago in remote Baglung district. Since then, he has been the centre of attraction at fairs across Nepal, with organisers paying to exhibit him.
Khagendra weighed just 600 grams at the time of his birth. His father says he has no explanation for why Khagendra never grew taller. His younger brother has a normal height for a boy of 13.