Kovacic spent last season on loan at Stamford Bridge and has been able to join Chelsea permanently, despite the club’s transfer ban, due to the Blues holding his registration.
The Croatia international is delighted to be staying in west London for the long term after making 51 appearances for Chelsea last season under former manager Maurizio Sarri.
"I really enjoyed my season on loan with Chelsea, I feel comfortable at the club and like London and the Premier League very much," he said in a statement. "I am very happy to be able to join permanently.
"We had a successful year, winning the Europa League and I hope I can make a big contribution in the coming seasons."
Meanwhile, Chelsea have opted against signing Kovacic’s fellow loanee Gonzalo Higuain on a permanent basis. Higuain arrived from Juventus in January and the Blues had the option to extend his loan deal for €18m (£16m/$20m) or sign him permanently for €36m (£32m/$41m).
However, after Higuain mustered just five goals in 18 appearances in all competitions, Chelsea have decided not to activate the terms of their agreement with Juventus.
This means that Kovacic will likely be Chelsea's only senior signing this summer after FIFA imposed a transfer ban on the club for the signing of under-18 players from overseas.
The ban is currently due to last until next summer and, though Chelsea have appealed to the Court of Arbitration for Sport (CAS) to have the sanction overturned, they have not asked for provisional measures to have the embargo frozen.
Chelsea’s next announcement to follow on from the Kovacic signing could be that of the appointment of Frank Lampard as the club’s new manager to replace the now Juventus coach Sarri.
Derby County confirmed on Monday that they are excusing Lampard from the beginning of their pre-season preparations as talks continue over a deal for the former England international to return to Stamford Bridge.
The deal is thought to be close and the move would see the legendary midfielder return to Chelsea, where he holds the club record for scoring 211 goals during his distinguished career with the Blues.