In order to improve the identification accuracy and tracking performance of parameter estimation, two improvements on model reference adaptive system (MRAS) based on-line estimation method with VSI nonlinearity compensation are proposed for permanent magnet synchronous machines (PMSMs) in this paper. Firstly, the stator resistance and inductance identification equations are derived separately under the stationary two-phase reference frame (αβ-axis). The stability of the system is analyzed with the Lyapunov stability theorem. Secondly, exponent-form saturation functions are proposed to accelerate the estimated tracking speed and suppress the steady-state fluctuation. Finally, the paper analyses the distorted voltages caused by the voltage source inverter (VSI) nonlinearity and derives the equation of their influence on the estimation, of which the accuracy is proved with a compensation method. Several experiments were implemented on a PMSM with small electrical parameters. The result shows the validity of the proposed parameter identification method.