Schalke have agreed with City, who have the player under contract until 2017, an option to buy Nastasic at the end of his loan spell, the German club said in a statement.
Nastasic flew out early on Wednesday to join the team at their training camp in Qatar, the club said.
The tall 21-year-old joined City as a teenager in 2012 on a five-year deal but has been unable to force his way into Manuel Pellegrini's side.
Nastasic has made one appearance for City this season, in the 3-0 Community Shield defeat by Arsenal in August.
Schalke, who are fifth in the Bundesliga, have conceded 21 goals in 17 league games compared to leaders Bayern Munich's four.
The Ruhr valley club face Real Madrid in the Champions League round of 16 next month. Nastasic has not featured in any Champions League games this season.
The Bundesliga resumes on Jan. 30 after the winter break.
(Reporting by Karolos Grohmann; Editing by Ken Ferris)
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