The Premier League club said the 25-year-old, part of the Croatia team who reached last year's World Cup final in Russia, had signed a five-year contract.
Kovacic arrived at Chelsea last August as part of a deal that took Chelsea's then-keeper Thibaut Courtois to Real on a six-year contract.
Chelsea were able to complete the signing despite a 12-month transfer ban imposed by world ruling body FIFA because Kovacic was registered to the club last season.
A regular at Stamford Bridge last season, he helped the West Londoners win the Europa League and finish third in the Premier League.
"Mateo proved what an accomplished player he is during his season on loan with us and we are delighted to welcome him to the club on a permanent basis," said Chelsea director Marina Granovskaia in a statement.
"He already possesses extensive experience at club and international level and we are sure he will be a big success with Chelsea over the next five years."
(Reporting by Alan Baldwin, editing by Ed Osmond)
