Would your Grandmother want you getting rid of it?
Personally, I’d keep it - but I’d write an essay explaining how it came into your family, a bit about the horrors of the Nazi regime, how your grandfather contributed to the war effort, and how this was a symbol of your family’s contribution to the destruction of an evil ideology. I’d then include that with the flag, along with any pictures of your grandfather and maybe some general WWII photos of a building with such a flag displayed in it, to give it some historical context.
You could even frame it, in folded state, so the swastika isn’t showing (Or a small piece of it is, so people know what it is), and add a picture of your grandfather to the frame - preferably any photos of him from WWII. If you want, add a picture of Auschwitz or Treblinka or something like that, and turn it into a historical display. If you can get any of your grandfather’s service ribbons, or any of his other WWII memorabilia, add it to the display.
Failing that, I’d donate it to a museum. I would not destroy it. It is still an historical artifact. It’s just as important to remember our historical failings as our successes, so we don’t repeat them. I don’t want the Nazis airbrushed out of history, I want them remembered as a cautionary tale of what can go wrong if you lose sight of your basic values.