Faraaz was recognised by the foundation for his heroic end during the Holey Artisan attack on July 1 this year - when he refused to leave his friends behind and was slain along with them by terrorists.
His friends were Abinta Kabir, a Bangladesh-born US citizen and a student at Emory University; and Tarishi Jain, an Indian student at the University of California, Berkeley.
The award was handed to Faraaz's mother, Simeen Hossain, and his older brother, Zaraif Ayaat Hossain, by the former Afghanistan President Hamid Karzai and Mother Teresa's Disciple Sister Priscilla.
This is the first time any foreign recipient has been honoured posthumously by the foundation.
Also present during the ceremony were Harmony Foundation President Abraham Mathai, former Chief Minister of Jammu and Kashmir Farooq Abdullah, and filmaker Mahesh Bhatt.
Faraaz was a student at Emory University's Goizueta Business School in the US. He was the son of Simeen and Muhammad Waquer Bin Hossain and grandson of Transcom Group Chairman Latifur Rahman and Shahnaz Rahman.
The Holey Artisan restaurant in Dhaka’s upscale Gulshan neighbourhood was popular with expats and the city’s wealthy. Japanese and Italian diners were among the 22 hostages shot and hacked to death in the July attack, which authorities blamed on a local group despite claims by IS that it was behind the carnage.