The defender had looked set to leave Stamford Bridge in the summer, with Paris Saint-Germain widely tipped as a possible destination. However, the 32-year-old will now extend his stay in west London.
"I am pleased I will be starting my eighth season at Chelsea. I have great memories here and I enjoy coming to training every day. The staff are amazing and I enjoy training with the lads," Cole told the club's official website.
He added, "I have been able to fulfill nearly all my ambitions at Chelsea. I have won the Champions League, the League, I have won FA Cups here but of course you don't want to stop winning trophies and being at a big club, you are always fighting to win a trophy.
"Being here for seven years and being at Arsenal before that playing for trophies, you never lose that hunger. I wanted to stay at Chelsea because we are always fighting and challenging for trophies. That desire and the will to want to win things have not gone."