Gerrard, regarded as one of the greatest players in Liverpool history, won 11 major trophies for his hometown club and went on to make 114 international appearances for his country.
The 37-year-old arrived in Glasgow on Friday afternoon to sign the contract, replacing Graeme Murty who was an interim manager after the sacking of Pedro Caixinha.
"I am honoured to become the next manager of Rangers. I have enormous respect for this football club, and its history and tradition," Gerrard said in a statement.
"I can't wait to start this new journey at Rangers as we look to build on the many successes that this club has achieve."
The club said details of Gerrard's backroom staff "will be announced in due course."
Gerrard joins the Glaswegian club, currently third in the Scottish Premiership table, in the wake of the team's 5-0 defeat by city rivals and reigning champions Celtic.
The move will see him go head-to-head against his former Liverpool manager Brendan Rodgers, who has guided Celtic to two league titles since his arrival in Glasgow.
Rangers chairman Dave King said: "From the very beginning, talks have been extremely positive and we believe that Steven is the right man to drive Rangers forward."
"Make no mistake, Steven fully understands the demands that come with managing a club of this stature and we look forward to exciting times ahead," Mark Allen, director of football added.
In 2015, Gerrard bade farewell to Liverpool fans and joined Major League Soccer's LA Galaxy on a two-year deal.
But it was while at Liverpool, a club he had been with since the age of nine, his status as a great was cemented -- winning the Champions League, FA Cup, League Cup and Europa League.
The former captain, who since 2017 had been a Liverpool academy coach, is even an inspirational figure for Mohamed Salah, Liverpool's current star player.
In an exclusive interview, the Liverpool forward told CNN's Becky Anderson that Gerrard was his favorite player.
"I used to play Gerrard on the PlayStation. I remember he used to shoot from afar and scored an immediate goal," Salah said. "I met him twice, he is a great man."