The Portuguese has signed a four-year contract and returns to the club he led to two Premier League titles, and FA Cup and two League Cups between 2004 and 2007.
Although he was sacked by owner Roman Abramovich, Mourinho remains a hugely popular figure at Stamford Bridge.
His return will be greeted with delight by Chelsea fans, who protested bitterly against his predecessor Rafa Benitez.
Chelsea’s chief executive Ron Gourlay said: “I am delighted to welcome Jose back to Chelsea. His continued success, drive and ambition made him the outstanding candidate.
“It is our aim to keep the club moving forward to achieve greater success in the future and Jose is our number one choice as we believe he is the right manager to do just that.
“He was and remains a hugely popular figure at the club and everyone here looks forward to working with him again.”
Mourinho ended his three-year tenure at Real Madrid on Saturday with a 4-2 win over Osasuna.
Although he won a Liga title, he had a turbulent relationship with senior players such as Iker Casillas and lost the support of many fans.
On Sunday night, he said: “I feel the people (at Chelsea) love me and in life you have to look for that.
“Life is beautiful and short and you must look for what you think is best for you,” added Mourinho, who has also enjoyed successful spells as coach of Porto and Inter Milan.
Mourinho will be accompanied by three staff – Rui Faria, Silvino Louro and Jose Morais – as assistant first team coaches working alongside current first team staff Steve Holland, Christophe Lollichon and Chris Jones.
Chelsea said he will be officially presented in a news conference at Stamford Bridge on Monday, June 10.