The 40-year-old has agreed to fresh terms that will reportedly see his wages increased from the €120,000 salary he has had since making the step up from the Primavera team.
It is also claimed Gattuso will have a say in the club's transfer plans for next season as part of the agreement.
Milan made the announcement live on their official Facebook account, with managing director Marco Fassone confirming a three-year deal for Gattuso.
He said: "Rino Gattuso will be the coach of AC Milan for the next three years, and one of the most important decisions that I and [Massimiliano] Mirabelli have made during this period."
Gattuso's new deal is a reward for Milan's improvement on the pitch since he was appointed as coach following the departure of Vincenzo Montella in November.
The Rossoneri have won nine of their 16 Serie A matches under the former Italy midfielder, although they missed the chance to close the eight-point gap to Inter in fourth with Wednesday's 0-0 derby draw at San Siro.