The agreement, which is subject to a successful medical, runs until the end of June when Schalke will have the option of making the transfer permanent.
Schalke will reportedly pay a loan fee of around £1.6m to secure Nastasic’s services on loan, while the buy-out clause is just over £10m.
Nastasic has not played for City since August’s Community Shield defeat to Arsenal and has four centre-halves ahead of him in Manuel Pellegrini’s plans.
The 21-year-old, signed from Fiorentina in 2012, was a regular under Roberto Mancini in his first season but is now behind Vincent Kompany, Martin Demichelis, Eliaquim Mangala and Dedryck Boyata.
West Ham were also linked with the player, but manager Sam Allardyce gave up on a deal after being told Nastasic would prefer to leave the Premier League.