The 26-year-old Belgium international would have been a free agent next summer but his new Chelsea contract will prevent him from walking away for free.
This will be the second time Batshuayi will be spending time on loan at Selhurst Park.
The former Standard Liege striker spent the second half of the 2018/2019 season at Palace and scored an impressive six goals in 13 appearances for the club.
"I feel like I'm home now, so it's good. But I need to do a good season here, to work a lot with my team-mates and I want to do my best here," Batshuayi told Crystal Palace's website.
"It's not my first time here. I know the team-mates, I know the gaffer, I know how the club works here. For me, it's the best decision.
"I'm happy, the coach is happy, my team-mates are happy. Let's get to work."
Palace manager Roy Hodgson added: "I am very happy we have secured Michy on a season long loan."
"He made a great impact at the club in his previous loan spell, albeit only five months long, displaying a goal scoring threat which we very much needed at that time and we are confident he will produce again.
"As a player who will help to convert our chances in to goals, Michy will be another valuable addition to the two new signings we have made this summer.
"It's another boost for the players and fans alike, and I'm sure everyone will join me in saying welcome back Michy."
Batshuayi joined Chelsea from Olympique Marseille in the summer of 2016 for £33m but has not commanded a regular starting berth since the move, spending time on loan at Borussia Dortmund and Valencia.
He did however score the goal that crowned Chelsea as Premier League champions in a 1-0 win at West Bromwich Albion in the 2016/2017 season.
