The 48-year-old was placed in interim charge at Plainmoor in February when it was revealed that Martin Ling needed some time off to recover from an illness.
Ling has since been sacked and following Knill's success in keeping the team in the Football League, the board have decided to offer him a permanent contract, which he has accepted.
"I am absolutely thrilled to welcome Alan Knill as the new manager of our club," said Torquay chairwoman Thea Bristow. "Alan was obviously the number one candidate for the job and I would like to personally thank him for his efforts last season.
"We welcome him to the permanent position of Torquay United manager and look forward to happy times ahead"
Knill had been out of work since he left Scunthorpe United in October 2012.