The European champions announced on Wednesday afternoon that the Croatia playmaker, 38, was staying on.
Modric signed for Real from Tottenham in 2012 and has won six Champions Leagues and four LaLiga titles in that time, in an overall total of 26 trophies.
Real described Modric as "a legend of Real Madrid and world football".
Modric won the 2018 Ballon d'Or, having helped Real to the European title that season and led Croatia to their first-ever World Cup final.
He has played 534 times for Los Blancos, scoring 39 goals.
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