The 46-year-old, who made 229 appearances during a six-year stint with the Scottish champions, has been appointed the assistant to new manager Ronny Deila.
"I am delighted to appoint John to the position of assistant manager. I have had a number of meetings with John, I can see what the club means to him and I can see the qualities that he will bring to Celtic," Deila told the club's official website.
"He will start immediately and together we will now prepare for this first day of training next week. We have important matches in the near future so I am pleased that I have been able to secure him so quickly. Now we can get to work."
Meanwhile, Collins added: "It is a huge honour for me to return to Celtic, the club which has always been such a major part of my life.
"I am grateful to Ronny for giving me this wonderful opportunity and I look forward to working closely with him and the players to ensure that we can continue to bring the good times to Celtic. I know what a great club Celtic is and I know exactly what the club means to our fans."
As well as Celtic, Collins also represented Monaco, Everton, Fulham and Hibernian during his playing career.