The mural in Hopewell Crescent depicts McKeag wearing a beret amid a blue sky background with the words 'Remember With Pride'.
McKeag, nicknamed Top Gun, was associated with at least 12 murders before he died of a drug overdose in 2000. The new mural replaces a previous one which featured a smaller image of McKeag.
An NIHE spokesman confirmed the mural is on its property and that it had not given permission for it to be painted, nor for a small wall enclosing a memorial garden to be built.
A community activist told the Belfast Telegraph that McKeag's family are behind the redone memorial, adding: "The mural has been there for 15 years, it is difficult to see why objections are being raised now." He also said he is not aware of the NIHE having approached the family about the mural.
SDLP councillor Tim Attwood said the NIHE should examine its policy on paramilitary murals.
"The NIHE and other agencies have put money into reimagining such murals across Northern Ireland, and I really think that should be the direction of travel rather than promoting violent images of the past," he said.
Alliance councillor Emmet McDonough-Brown said the NIHE should address the matter.
"NIHE have a responsibility to the communities they serve to avoid glorifying paramilitaries," he said.
"It's a part of our history we should address constructively instead of eulogising it."
An NIHE spokesperson said: "A number of weeks ago we were informed that work was to be undertaken by a family to tidy up a mural and associated surroundings at Hopewell Crescent.
"On Tuesday, we were made aware that the mural on a gable wall had been replaced and that a wall has been built on adjacent land.
"In a post conflict society, issues, such as these, present a challenge for the whole of society.
"We will continue to discuss and engage with others and with local communities to find a resolution to such issues."