To surmount the limitations of bulk MgH2 for the purpose of hydrogen storage, we report here, a detailed first principles density functional theory (DFT) based study on the structure and stability of neutral (Mgm) and positively charged (Mgm+) Mg nanoclusters of different sizes (m=2,4,8 and 12) and their interaction with molecular hydrogen (H2). Our results demonstrate that H2 is weakly bound to the Mg nanoclusters through van der Waals interactions. Incorporation of Grimme’s dispersion correction (D3) in the DFT based exchange–correlation functionals leads to improved accuracy of H2 interaction energy (IE) values that fall within an energy window (between physisorption and chemisorption) desirable for hydrogen storage. Energy decomposition analysis reveals the significance of polarization energy for these Mg–H2 binding. Ab-initio molecular dynamics simulation shows that complete dehydrogenation from these Mg nanoclusters occur at ∼100°C which is a significant improvement over bulk MgH2 (∼300°C).