Mg-doped PbS/PVA freestanding nanocomposite films were successfully prepared by a simple chemical route. X-ray diffraction patterns confirm the formation of all the films with cubic phase of PbS. Optical absorption spectra showed the blue shifted phenomena and the band gaps of Mg : PbS/PVA films increase with an increase in Mg concentration. The increase in resistivity with reducing particle size was examined for these films. The Z-scan results showed that the freestanding nanocomposite films exhibit the large nonlinear refractive index and absorption coefficients with negative sign and they are increased with Mg doping. Third-order nonlinear optical susceptibility and figure of merit were calculated and the maximum value is found to be about 3.405 × 10−5 esu and 2.067 × 10−9 esu m, respectively, for higher Mg-doped film which is three orders of magnitude larger than that observed in the substrate-supported films as reported earlier in the literature. The results show that the Mg : PbS/PVA films have great potential applications in future optical devices.