The five-year deal means pensioners no longer have to wait until after 9.30am to travel to travel for free.
The cost of providing the Freedom Pass on all services for the current financial year is£270m.
Under the new agreement the overall costs for providing the Pass on TfL services - determined, in principle, by usage - will be capped for each year between 2010 and 2015.
In return for this agreement, the boroughs have agreed to help fund the 24-hour extension of the Freedom Pass for older users on TfL services.
London Councils’, chairman Merrick Cockell (Con), said: “Today’s agreement will mean that a million older Londoners will be able to enjoy access to the majority of London transport 24 hours a day.
"It also represents another landmark in relations between the boroughs and the Mayor. While this is clearly beneficial to both parties - it is older Londoners who will really reap the rewards.”