The 51-year-old has replaced Spaniard Jose Francisco Molina, who led the club to their second title in three years in his only season as coach.
Sheringham, who won three Premier League titles and the Champions League with United, lasted eight months in his first managerial role with League Two side Stevenage before leaving the club in February 2016.
Atletico de Kolkata, owned by a consortium including Spanish club Atletico Madrid and ex-India cricket captain Sourav Ganguly, won the first ISL competition in 2014.
Meanwhile, Jamshedpur Football Club, one of the two new entrants, have named another former England and Manchester United player, Steve Coppell, as their manager for the upcoming season. The 62-year-old took Kerala Blasters to the ISL final against Kolkata last year.
And former United assistant coach Rene Meulensteen has been appointed as head coach of Kerala Blasters.
Last week former Aston Villa boss John Gregory was named in charge of Chennaiyin FC, succeeding World Cup winner Marco Materazzi who had been in the role for three years.
This year’s revamped five-month competition starts on October 1 with two new teams making it a 10-team league.