The Colombia international, on a season-long from Monaco, was reportedly in the Spanish capital on Monday in the hope of sealing a return to La Liga.
However, those hopes were ended when a move to China fell through for Atletico's Jackson Martinez.
Falcao has made just one Premier League start for Chelsea and his only goal in 15 appearances came as a substitute.
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The 29-year-old arrived at Stamford Bridge last July having had a disappointing loan spell at Manchester United during the 2014-15 season.
He has not played for Chelsea since 31 October, was sidelined with a thigh injury at the start of November and suffered a recurrence of the problem in a training game in December.
During two years at Atletico, Falcao helped the side win the 2012 Europa League and 2013 Copa del Rey.
He scored 52 goals in 68 league games for the Colchoneros.
Chelsea striker Radamel Falcao was denied the chance to re-join Atletico Madrid on transfer deadline day.