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The 28-year-old has signed a three-year deal at Ibrox for an undisclosed fee, after initially joining on loan in January.
The former Motherwell and Sheffield United wideman netted five times in 19 games during his loan spell and becomes the third permanent signing of the Steven Gerrard era, following the arrivals of Scott Arfield and Allan McGregor earlier this week.
Speaking to the club’s website, Murphy said he was “delighted” to seal a permanent move to his boyhood heroes.
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Murphy added: “This club means a lot to me and it already feels like home.
“Whilst I’m naturally disappointed we didn’t complete the objectives that we set for ourselves last season, I am more determined than ever to help this club to be a success.
“With the new manager in place, two new signings confirmed already and an exciting summer to follow, I can’t wait to get started on the next chapter of my Rangers career.”
Gerrard said Murphy’s contract was “more good news”, adding: “He had an impressive start to his Rangers career in the second half of last season and we hope to see him continue to grow at the club next season and beyond.”