The 32-year-old will return to the club for the second time, resuming the role of star striker for the squad.
With 51 international goals to his name, Chhetri is India's highest goal-scorer and was also the top scorer for reigning I-League champions Bengaluru FC during the 2015-2016 season.
Beginning his professional career with Mohun Bagan, Chhetri went on to become the first Indian footballer to be part of a Major League Soccer (MLS) club when he joined the Kansas City Wizards in 2010.
He later represented B-team of Portuguese giants Sporting Clube de Portugal. Chhetri has also represented some of the biggest teams in Indian football and has been part of Dempo SC, East Bengal, Mohun Bagan and Bengaluru FC.
Scoring twice in his second game, Chhetri led Mumbai City FC to their first win of the 2015 season. He scored seven goals to become the highest-scoring Indian in last year's ISL, which included a hat-trick against North East United FC.
Speaking of the upcoming edition of the ISL, Chhetri said, "I am elated to return to Mumbai City FC for season three of the ISL. It is a great club with amazing fans. Ranbir, Mr Parekh, Indranil and the entire team have been great to work with and I can't wait to don the blue of Mumbai and hopefully give the fans a better result."