He becomes the club's sixth capture of the summer following the earlier additions of Jordan Rhodes, Matty Pearson, Ollie Turton, Josh Ruffels and Lee Nicholls.
Colwill arrives in Yorkshire after signing a long-term contract with his parent club, who have allowed the teenager to go out on loan to aid his long-term development.
The left-sided player, capped by England at under-17s level, has made rapid progression through the Chelsea ranks and played in the Blues' three Papa John’s Trophy games against EFL opposition last term.
He also featured 18 times for the club’s under-23 side in the Premier League 2 last season and finished the campaign training with Thomas Tuchel’s senior squad in the build-up to their Champions League victory over Manchester City.
The 18-year-old has been brought in to Huddersfield in time for the start of pre-season to enable him to assimilate fully ahead of the 2021-22 Championship campaign.
Head of Football Operations Leigh Bromby said: “It’s fantastic that we’ve been able to take the opportunity to bring a player as talented as Levi to the club.
"We’ve said that Premier League loans often tend to happen later in a transfer window, as parent clubs understandably want to keep their best youngsters in-house during pre-season.
"Chelsea have shown real faith in us by making an early decision to send Levi here to continue his development, which is testament to the hard work our team has put in to showcase our plans for him.
"Chelsea have high hopes for Levi, and we believe he can make a real impact for us in the Championship this coming season. He fits all the criteria we look for in our system in a left-sided centre back, and I’m sure he will continue to improve under Carlos and our coaches.
"I’d like to thank Neil Bath at Chelsea for their help during our negotiations."
Head Coach Carlos Corberán added: "I’m looking forward to working with Levi this season, as he is a very talented player with big potential.
“He has many of the qualities we look for in our centre backs. He is already very impressive physically, and his athletic ability will help the team defend the space in behind.
"He is also very comfortable in possession, as you would expect from someone who is in the Chelsea Academy.
“We will do everything we can to help him adapt, both off the pitch as he moves north and on the pitch in the Sky Bet Championship.”