The 25-year-old who spent last season on loan with the Blues will return to Stamford Bridge on a five-year deal and is likely to be the club’s only purchase this summer due to the 12-month transfer ban enforced by FIFA.
Speaking about the move, Kovacic said: “I really enjoyed my season on loan with Chelsea, I feel comfortable at the club and like London and the Premier League very much. 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.”
Despite not being able to sign any new players due to the ban, Chelsea were able to buy Kovacic outright as he was registered to the club last season while on loan from Real Madrid.
Kovacic joined the Blues on a season-long loan deal on transfer deadline day last August and featured prominently under former boss Maurizio Sarri, playing 51 times in total.
The former Dinamo Zagreb and Inter Milan midfielder failed to score in any of his appearances for the club but did impress during Chelsea’s Europa League final win over Arsenal.
An official Real Madrid statement read: “Real Madrid CF and Chelsea FC have agreed to the transfer of player Mateo Kovacic.
“The club wants to thank Kovacic for all these years of dedication, professionalism and exemplary behavior, and wishes him good luck in his new stage.”
Real have spent approximately £300m on new players already including £88m rising to a potential £135m on Eden Hazard from Chelsea.
Frank Lampard’s return to Chelsea is edging closer to completion, as Derby County have given him permission to miss the start of pre-season as negotiations continue.