After helping Claudio Ranieri's men win the topflight last season, the 24-year-old has struggled for playing time at King Power Stadium this campaign, having made only four league appearances thus far.
Prior to his latest move, the utility man was linked to West Brom as well as Aston Villa.
"I am delighted we have been able to secure Jeffrey’s services," Palace manager Sam Allardyce, said as reported by the club's official website.
"He is a player I have admired for some time and is a talented and athletic player.
"He will bring strength and experience to the defence and will be a major asset for the club having just turned 24."
Schlupp joined Leicester’s academy at the age of 11, making his way through the ranks before earning his league debut against Reading in the 2011-12 English Championship.
He made a total of 149 first team appearances for the Foxes, scoring 15 goals.
The German-born's inactivity this season has had repercussions on his international career, having been snubbed by Ghana coach Avram Grant for the 2017 Africa Cup of Nations, which kicks off on Saturday.