Muscat, a 43-year-old former journalist who has been premier since 2013, called the general election a year early after his wife was implicated in an alleged corruption case arising from the Panama Papers data leak.
He took his oath of office at the president's palace in Valletta before proceeding on foot amid throngs of cheering supporters to the Auberge de Castille, which houses the prime minister's offices.
Official results show that Labour won more than 55 percent of the votes, beating the Nationalist Party by over 35,000 votes, a result similar to that achieved four years ago.
The Nationalist Party won 43.7 percent, the greens took 0.83 percent, while the rest went to independent candidates.
Muscat's party is expected to have a nine-seat majority in the 69-seat parliament.
"My priority is to unite the country. We have huge potential but we need to erase the divisiveness this campaign has brought about. There are people with potential on either side," Muscat told journalists after the ceremony.
"Irrespective of the electoral result -- which was the biggest ever -- this will not lead to us treating people like flies. It places an even greater responsibility on our shoulders," he said.
A judicial inquiry is underway to determine whether an offshore company disclosed in the Panama Papers leak actually belongs to his wife, Michelle. They have both denied the claims.
The leaked documents also revealed hidden offshore companies allegedly owned by the country's energy minister, Konrad Mizzi, and by Muscat's chief of staff, Keith Schembri.
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