The Citizens and the 29-year-old have held positive talks regarding personal terms over a summer transfer.
With his contract at Stamford Bridge due to expire in 2024, talkSPORT understands that the Blues are open to selling him with Mauricio Pochettino keen to trim his bloated squad.
And Pep Guardiola appears to have identified him as the ideal successor to Gundogan, who is set to become a free agent.
It is unlikely to be a hectic window for City, who have won three straight Premier League titles and are also chasing a treble as they prepare for their FA Cup and Champions League final dates with Manchester United and Inter Milan respectively.
Already boasting a star-studded squad, there isn't too many areas of concern for Guardiola. But he may look to bring in a new defender with Joao Cancelo likely to leave after falling down the pecking order.
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Kovacic's Croatian compatriot Josko Gvardiol is believed to be on City's radar, though it remains to be seen how much RB Leipzig would want for the centre-back.
In a 3-2-2-3 formation, which Guardiola has often used in crunch games this season, talkSPORT.com takes a look at how City could start next term.
Brazilian goalkeeper Ederson will keep his place between the sticks having missed just 11 top-flight games in six years.
A back three could then consist of Kyle Walker, Ruben Dias and Gvardiol.
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This would see Nathan Ake and Manuel Akanji drop to the bench, while Aymeric Laporte is facing an uncertain future - the Spain international featuring in just 12 Premier League games.
Guardiola could then opt to start Rodri and natural centre-back John Stones as his two defensive midfielders.
Stones has thrived in the holding position, telling talkSPORT in April he is relishing his new role.
Featuring as the two advanced central midfielders would then be Belgian playmaker Kevin De Bruyne and Kovacic - a direct replacement for Gundogan.
Phil Foden may have only started 22 top-flight games this season, but he could start on the right wing, with it remaining to be seen if Bernardo Silva departs.
Both Paris Saint-Germain and Barcelona have been linked with the Portuguese star, who has two years left on his contract.
Jack Grealish would then feature on the opposite flank, with who else but Erling Haaland to lead the line after his record-breaking Premier League season.