Signing a short-term deal with the club in February, the 36-year-old made five appearances for the Glovers towards the end of the 2017/18 campaign helping to pick up eight points whilst finishing on the losing side just once.
Missing the final six games of the season with a fractured ulna, the former Brentford, Norwich, Leyton Orient, Notts County and Aberdeen stopper has now committed his future to the club.
Having spent almost six years at Gillingham prior to arriving in Somerset, Nelson boasts over 400 EFL appearances to his name and will add to manager Darren Way’s core of already contracted players.
Securing the services of the Stroud-born stopper, Town’s boss was thrilled with his first signing of the summer.
Commenting, Way said: “Nels has added a huge amount to the squad both on and off the pitch since his arrival in February.
“His vast experience is a huge asset to have and his leadership in the dressing room is outstanding. He’ll play a huge role in the coming campaigns and his contract is the latest step in driving us forward.
“This club has boasted some unbelievable goalkeepers and leaders and Nels will rival those at the very top of that list – I’m looking forward to working with him on a permanent, long-term basis.”