The 26-year-old made just one Championship appearance for the Seagulls last term as they won automatic promotion to the Premier League.
Towell, who moved to the Amex Stadium in 2015, will now spend the 2017-18 campaign at New York Stadium as Rotherham bid for promotion back to the Championship.
"Richie wants to play regularly and this is an ideal opportunity for him to do that. It's a move that benefits all three parties: the player, ourselves and Rotherham," Brighton boss Chris Hughton told the club's official website.
"Richie is a great professional that always works hard in training, and this will provide him with the opportunity to play regular first-team matches."
Towell could make his debut for the club during Sunday's League One clash with Portsmouth.