The 22-year-old, who will be available on a free transfer in the summer, joined the Royal Blues from Alemannia Aachen in 2009 and has established himself as one of the best young midfielders in Germany.
News of his impending departure is a huge blow for Schalke who had been hoping he would join Holland striker Klaas Jan Huntelaar in signing a new deal.
Board member Horst Heldt said: "We had hoped that Lewis saw his future at Schalke beyond the end of the season.
"But, like Klaas Jan, he has made a personal decision that we respect.
"We are sure he will give everything between now and the end of the season."
Holtby's father is English and he has inevitably been linked with a host of clubs in the Premier League, including Arsenal and Liverpool.