The ceremony marked the 40th anniversary of the show and brought out recent Oscar winner and hometown favorite Matthew McConaughey, who told the crowd, "There would be no Austin City Limits without Willie Nelson."
"He's been called Saint Willie," McConaughey continued. "There's a statue of him in the middle of downtown Austin on a street called Willie Nelson Boulevard. He's always been larger than life, a living legend. He's an icon, an inspiration to many."
Nelson, who turns 81 on Tuesday, was the very first musician to perform on Austin City Limits in 1974.
"It's really exciting," Nelson told PEOPLE exclusively of the accolade just before the show began. "Everything is good right now. It is a great honor."
Nelson said that Austin City Limits has always been a great place to play.
"Music is done very well there," he shared. "There was a time when television shows weren't the best for doing the music. They could do the pictures fine but they hadn't got the sound down. These guys had the sound right from the beginning and I think that's why they had so many artists jumping up and down to be on their show. They had people there who knew music."
And the city of Austin has embraced musicians, he said.
"I think it's the best city in the world for music," Nelson explained. "There are good cities that love music, but since South by Southwest hit town, it has brought all those people in from all over the world to play and listen to music … it has become a huge place for music."
Nelson hit the stage later in the evening with Emmylou Harris and Lyle Lovett to perform standards like "On the Road Again," "Roll Me Up and Smoke Me When I Die" and "Pancho and Lefty." McConaughey, who brought along son Levi, 5½, sat in the front row, enjoying the music and warmly greeting the family of late former University of Texas football coach Darrell Royal, who was also inducted into the ACL Hall of Fame for his support of Austin musicians. Additional inaugural inductees were Stevie Ray Vaughan and Double Trouble and show creator Bill Arhos.
"I feel like if I had changed anything about my life, I would be somewhere different right now," Nelson said. "I like where I am now."