Goal.com revealed that an agreement between Spurs and the Bundesliga outfit had finally been reached earlier on Monday, after weeks of negotiations.
The Germany international had already agreed a deal to move to White Hart Lane at the end of the season, but Spurs have been keen to tie up a permanent deal this month.
|MONDAY TRANSFER ROUND-UP
|12/1||Tottenham are 12/1 with bet365 to beat Norwich 3-1 on Wednesday night
Brazilian midfielder Sandro has been ruled out for the rest of the season through a knee injury, leaving Andre Villas-Boas short of numbers in the middle of the park.
Schalke had rejected several bids from Tottenham throughout the month for the playmaker, who is the captain of Germany's Under-21 side, although a deal has now been struck.
Holtby has scored four goals in 25 appearances for the Konigsblauen this term.