Modric completed his debut campaign at AC Milan last season, having arrived from Real Madrid.
The 40-year-old Croatian midfielder played a total of 37 matches for the Italian club, scoring two goals and providing three assists.
After several weeks of negotiations, he has now agreed to spend another season at the club, now managed by Ruben Amorim.
The midfielder will continue to wear the number 14 shirt for the Milan side.
He'll now enjoy a few days of vacation after taking part in the 2026 World Cup, before joining the squad in time for the training camp in Australia.
The Croatian midfielder joins new signings Goncalo Ramos and Mario Gila as players who have put pen to paper on a contract at the club this summer.