The Croatian midfielder, who turns 41 in September, joined Milan on a free transfer in 2025 after ending his 13-year spell at Real Madrid. He enjoyed an impressive first season at San Siro, making 37 appearances in all competitions and scoring twice.
AC Milan praised Modric's contribution both on and off the pitch after confirming the contract extension.
"A key figure in the Rossoneri midfield since his arrival, Luka has brought his experience and quality to the service of the team, both on and off the pitch, with humility and great passion," the club said.
"One of the finest and most iconic players in world football, the Croatian will continue his journey in the Rossoneri shirt with the ambition to reach new, important milestones."
The club also confirmed that Modric will continue to wear the No. 14 shirt.
Modric said he is excited to remain at Milan and is determined to help the club improve after a disappointing campaign.
"I am thrilled to stay at AC Milan, where you made me feel welcomed and loved from the very first day," he said.
"After a season below our expectations, the desire to bounce back is immense. A new season and a new challenge await us - a project I believe in and that motivates me.
"I am ready to continue to give everything again for this shirt and I am so proud to keep wearing these colours."
Milan finished fifth in Serie A last season to qualify for the UEFA Europa League and will begin the new campaign under head coach Ruben Amorim, who replaced Massimiliano Allegri in June.
The contract extension comes after Modric represented Croatia at his fifth FIFA World Cup. The captain started all four matches, passed the 200-cap mark for his country and helped Croatia reach the Round of 32, where they were beaten 2-1 by Portugal after a controversial late disallowed goal.
Modric has enjoyed one of football's most successful careers. He captained Croatia to the 2018 World Cup final and third place in 2022, while winning the Ballon d'Or in 2018.
His trophy collection also includes six UEFA Champions League titles and four La Liga crowns with Real Madrid, adding to the reputation he built during four successful seasons at Tottenham Hotspur.
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