"I'm happy to stay, in a place where I've felt welcomed and loved since day one," Modric told the club's official website.
"After a season below expectations, the desire for redemption is immense."
Looking ahead, he made clear his ambitions remain undimmed despite his age.
"A new season and a new challenge await us: a project I believe in and that motivates me. I'm ready to keep giving everything for this shirt, and I'm really proud to still be wearing these colours." He closed with a direct message to supporters: "I can't wait to get back to San Siro and hear you roar."
AC Milan confirmed the extension in a statement that praised the Croatian's influence both on and off the pitch since his arrival.
"A reference point for the Rossoneri midfield since his arrival, Luka has put his experience and quality at the service of the team, both on and off the pitch.
"Among the strongest and most representative players in the world, the Croatian will continue his journey in the Rossoneri shirt, with which he totalled 37 appearances and two goals last season, with the ambition of reaching new, important milestones. Luka Modric will continue to wear the number 14 Rossoneri shirt."
The renewal ties down one of Milan's most experienced figures for a second season at San Siro following his free transfer from Real Madrid last summer, after 13 trophy-laden years in the Spanish capital that yielded six Champions League titles among 28 pieces of silverware.
His first campaign in Italy fell well short of expectations, with Milan finishing fifth in Serie A under Massimiliano Allegri and missing out on Champions League qualification, a slump that ultimately cost Allegri his job and brought former Manchester United boss Ruben Amorim into the dugout.
Modric's decision to commit for another year comes fresh off a fifth World Cup with Croatia, where he started all four of his country's matches before a round-of-32 exit to Portugal, passing 200 international caps in the process.