Holtby, 22, had already agreed to join Tottenham on a Bosman free transfer in the summer but Spurs sought to bring the deal forward to the January window.
And, after weeks of wrangling, both clubs have agreed terms over an immediate deal to sign the Germany Under-21 captain.
"We are delighted to announce that we have reached agreement with Schalke for the immediate transfer of Lewis Holtby," Tottenham said on their website.
The deal to bring him in five months ahead of schedule has cost Tottenham a reported £1.5 million.
"We have found the best solution for everyone involved," said Schalke sporting director Horst Heldt. "Lewis had indicated to us that he would not be averse to change prematurely, and five months before the expiry of the contract FC Schalke 04 has still got a decent transfer fee.
"He has always behaved correctly and worked superbly until the last day for Schalke. We wish Lewis all the best and good luck for the future. "
Holtby made 27 Bundesliga appearances for Schalke this season, scoring three times.
In theory he could now be eligible for Tottenham's Premier League fixture at Norwich on Wednesday night.
Holtby, who plays either as a No. 10 or wide on the left, started his career with Alemannia Aachen before joining Schalke in 2009.
He enjoyed successful loan spells with both Bochum and Mainz before becoming a prominent member of the Schalke first team in the 2011-12 season..
Though he has an English father, Holtby has made three appearances for Germany.