The 71-year-old actor, loved by millions for his years playing Boycie, will take a guest role in the show, alongside Joan Collins who is returning for another run after making her debut earlier this year.
TV host and former EastEnders star Nadia Sawalha is also lined up to appear in the seventh series which will be screened next year and is currently in production.
Challis said last year that Benidorm writer Derren Litten had been keen to give him a role, saying: "I was really up for that but sadly I was not available and they couldn't work around my commitments."
Collins, 81, was seen as hotel group boss Crystal Hennessy-Vass in the sixth series which pulled in around 6.8 million viewers.
Returning to the cast once again will be Johnny Vegas as The Oracle, Elsie Kelly as Noreen and Crissy Rock as Janey.