The mansion of van Braam was bought due because of a need for the Dutch government to centralize power. However, Daendels Palace (currently Treasury Department) in Lapangan Banteng (formerly known as Waterloo Square) was not completed yet. Upon the completion of Daendels Palace, plans to centralize power changed, and the mansion of van Braam officially became the residency of the governor-general, and Daendels Palace housed administrative buildings. Hotel van den Gouverneur-Generaal (Hotel of the Governor-General) became the official name of the van Braam mansion.
During the Colonial era, important events took place in this building. Some of which include the declaration of the cultuur stelsel system by the Governor Graaf van den Bosch, and the ratification ceremony of the Linggadjati Agreement on March 25, 1947.
In mid 19th century, the palace does not suffice the accommodation of its administrative purposes, and under orders from J.W. van Lansberge, a new building that today become the Merdeka Palace was built within the complex in 1873 during the Governor General Loudon administration, and finished in 1879 during Governor General Johan Willem van Lansberge administration. This neoclasical building, designed by Drossares, was built in southern part of the complex directly facing Koningsplein (now Merdeka Square). The new Governor General palace at Koningsplein was also known as Istana Gambir (Gambir Palace).
After the war of Indonesian revolution from 1945-1949 and after the Netherlands official recognition of Indonesian independence, the Indonesian declaration of independence from the Dutch in 1949 was announced in Gambir Palace. During the ceremony, the Royal Dutch flag was substituted with the Flag of Indonesia. Many spectators were in jubilation when the flag took to the sky, and yelled "Merdeka! (Freedom!)". From that moment, Istana Gambir is known as Istana Merdeka.
One day after the ceremony, President Sukarno and his family arrived from Yogyakarta. For the first time, the President of the Republic of Indonesia stayed at Freedom Palace. The first Independence Day annual ceremony was held in the Istana Merdeka in 1950. Since the Dutch Colonial rule, Japanese Invasion and Indonesian Republic fifteen Governor-Generals, three Japanese commanders, and one Indonesian President has taken residency in the Freedom Palace.