It will be the 65-year-old’s third spell at Goodison Park, and this time he will concentrate on coaching some of the club’s young players.
He re-joins the club from Norwich where he was appointed as a consultant to manager Neil Adams only last month.
As a player Royle scored 119 goals in 275 appearances for Everton and as manager he won the 1995 FA Cup.
The former Oldham Athletic, Manchester City and Ipswich Town boss, who himself was a product of the Goodison youth system, will also assist in scouting and the recruitment of players.
Boss Roberto Martinez said: “Everyone knows the incredible influence Joe has had at our football club, both as a player and a manager. He is a true Evertonian and we all welcome him back to Goodison Park.
“We are all very excited with the talent coming through in our Academy and we pride ourselves on the work we do with the young players.
“Joe’s experience and football know-how will be hugely beneficial for the youngsters at a key stage of their development. He is the first major change in our structure in player development.”
Royle said: “It’s great to be back. Everyone knows how much Everton means to me – it has been in my blood for over 50 years.
“I admire what Roberto achieved in his debut season and I am really looking forward to working alongside him.
“I made my debut for Everton as a 16-year-old so I understand what it means to be a young player coming through at this football club. I’m looking forward to using my experience to help the players we have here.
“I was happy with my role at Norwich City and wouldn’t have considered an offer from any other club than Everton. It’s like coming home for me.
“I’d like to thank Norwich for their co-operation and understanding with this situation and I wish Neil Adams and everyone at Carrow Road all the best for the new season.”
Chairman Bill Kenwright said: “Joe is an Everton giant in every sense of the word and it’s great that he has come back home.
“Developing more young players is really important to us and we know Joe will play an important role in helping us achieve these aims.”