The Croatia international's previous deal was due to expire in June 2017, but he has now signed a new and improved contract that will keep him at the club for one additional season.
"Real Madrid C.F. announce the extension of Luka Modric's contract, linking him to the club for the next four seasons," a Madrid statement reads.
The 28-year-old joined the Santiago Bernabeu side from Tottenham Hotspur in the summer of 2012 and has since developed into a key player at the Champions League holders.
Modric has made over 100 official appearances in all competitions for Madrid, winning the Supercopa de Espana, Copa del Rey, Champions League and European Super Cup during his spell at the Bernabeu so far.
The midfielder previously wore the jerseys of Dinamo Zagreb, Zrinjski and Inter Zapresic before signing for Spurs in 2008.