The 29-year-old Colombia international spent last season on loan at Manchester United, scoring four goals in 29 games.
He links up with former Atletico Madrid team-mates Thibaut Courtois, Filipe Luis and Diego Costa.
Croatian midfielder Mario Pasalic, 20, goes the other way on loan for the season.
Falcao said: "I am very happy to be joining Chelsea.
"I can't wait to start training, to help with our aim of retaining the league title and being successful in Europe."
The striker scored 72 goals in two seasons for FC Porto between 2009 and 2011, before joining Atletico Madrid.
After 70 goals in two prolific seasons with the Spanish side, Monaco signed him for £50m in 2013.
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