Modric has replaced Nacho as Real Madrid skipper, with the experienced centre-back deciding against renewing his deal in order to make the move to Saudi Pro League side Al Qadsiah.
There had been widespread speculation surrounding Modric's future, with the Croatia international's deal with the Spanish and European Champions also expiring at the end of June.
Clubs from Saudi Arabia and North America are believed to have made attempts to sign him this summer, but the 38-year-old's preference was always to extend his deal with Carlo Ancelotti's side.
Real Madrid have now confirmed that Modric has penned another short-term deal with the club.
Modric signs new Real Madrid deal until June 2025
"Real Madrid CF and Luka Modric have agreed to extend the contract of our captain, who remains tied to the club until June 30, 2025," read a statement on the club's official website.
"Modric joined Real Madrid in 2012, and in his twelve seasons defending our shirt he has become a legend of Real Madrid and world football."
The Croatian made the move to Los Blancos from Tottenham Hotspur in the summer of 2012, and he has represented the club on 534 occasions, scoring 39 goals and registering 86 assists in the process.
Modric has won four La Liga titles, two Copa del Rey crowns and six Champions League trophies during an incredible career in the Spanish capital, and he will now be staying for at least another year.
Is Modric's new deal a surprise?
Modric had to accept not being a guaranteed starter in the Real Madrid midfield last season, but due to the volume of matches, he still made 46 appearances, scoring twice and registering eight assists.
The midfielder was only a late substitute against Borussia Dortmund in the Champions League final, but Toni Kroos's decision to retire from professional football this summer certainly strengthened Real Madrid's desire to keep hold of Modric for another year.
Jude Bellingham is expected to drop back into central midfield next season due to Kylian Mbappe's arrival, while Eduardo Camavinga, Federico Valverde and Aurelien Tchouameni will also be competing for starts.
Modric will again have to accept not being a guaranteed starter, but it would be a surprise if he did not have an important role to play during the 2024-25 campaign.
The Croatian demonstrated on enough occasions last season that he is still one of the most gifted midfielders in world football, and this is likely to be his final campaign representing the capital giants.