Gracia, who left his role with Osasuna following their relegation from La Liga last season, will take up the reins next week after Schuster announced his departure on May 16.
The 44-year-old only spent one season at Osasuna and was unable to keep them in the top flight, with relegation coming on the final day of the season despite a 2-1 victory over Real Betis.
"Malaga Football Club and Carlos Javier Gracia have reached an agreement that will bind the coach for the next two seasons," Malaga confirmed on their official website.
"The new coach will be presented on Tuesday, June 3 at 12:30 at the Estadio La Rosaleda."
Gracia will be challenged with rebuilding Malaga's fortunes after a disappointing 11th-place finish in La Liga, which followed two consecutive top-six placings.
