The 54-year-old has signed a two-and-a-half year contract until the end of the 2017-18 season less than three years after he was sacked by the Royals.
In his last spell at the helm, McDermott led Reading to promotion to the Premier League in 2012 before he was sacked with the Berkshire club struggling in the top flight.
Royals chief executive Nigel Howe told the club website: "With a connection to the club that extends back more than 15 years, Brian has an affinity with Reading, the town, its people, the fans and their football team.
"His reputation within football is of the highest order and we are delighted to have him on board again. We wish him the very best of luck."
Since leaving Reading in March 2013, McDermott has managed fellow Championship side Leeds United and has most recently been a scout with Arsenal.
He inherits a side that have lost four games in a row and lie 13th in the second tier.