The central defender has penned a deal that will keep him at the San Siro Stadium until 2017 after an impressive loan spell from Valencia.
The transfer fee has not been announced by Milan, but Sky Sports reported on Friday that the figure was likely to be around £3.375 million.
The France international, who has 26 caps for his country, spent the second half of last season in Italy and provided a steely presence in the Milan rearguard.
According to ESPN, Rami was allowed to leave Valencia on loan after criticising his head coach, Miroslav Djukic, and his team-mates.
The deal gave Milan an option to buy the 28-year-old outright in the summer, which new manager Filippo Inzaghi has decided to exercise.
Rami has provided an imposing defensive figure for the Rossoneri since joining on loan, and his commanding presence has offered a greater protection at set pieces and aerial duels.
And WhoScored.com statistics note that Rami is not prone to lunging into tackles for his team, while long-range passing is a key strength to his game.
However, Bleacher Report Serie A writer Matteo Bonetti believes that Rami needs a solid presence alongside him to further improve Milan under Inzaghi next season.
Bonetti wrote in February:
Taking a look at the changes just goes to show how confused Milan's coaching staff has been with the defense.
So far, he has partnered with Daniele Bonera, Christian Zapata, Philippe Mexes and Cristian Zaccardo in the heart of the defense in the past month. He has massively outperformed all of these defenders and needs one of them to step up so they can create a formidable partnership once the chemistry builds.
However, the arrival of Alex from Paris Saint-Germain last month, as Sky Sports reported, should provide some solidity at the back for Milan.
The news of the signing of Rami from the Spanish club has been greeted with delight by Milan supporters and, notably, by the player himself on his official Twitter timeline.
And Milan supporters were equally pleased at the signing.
Now those supporters will be looking for an improvement in their club's back line next season with Rami and Alex paired in central defence.