The 35-year-old defender has made 703 appearances since his debut in October 1998, but was suspended for the season-concluding 1-1 draw with Premier League champions Leicester.
Terry's current contract was set to expire on June 30, but an agreement has been reached for him to stay on at Stamford Bridge under new manager Antonio Conte next season.
"I am delighted to sign a new contract with the club," Terry told the club's website. "Everyone knows I'm Chelsea through and through.
"I am looking forward to next season under the new manager and hopefully we can make it a successful one.
"Also, a special mention to the fans for their continued support. You're the best in the world."
Terry had looked set for a Chelsea exit after a career in which he won four league titles, five FA Cups, three League Cups, one Champions League and the Europa League, along with 78 England caps.
However, a new one-year deal was put on the table last week, the length of contract in keeping with the proposal offered by a number of top clubs to players over 30 years of age.
Chelsea chairman Bruce Buck welcomed the news concerning their long-serving captain and said: "We are delighted John will spend another year at the club. He has been the leader of the Chelsea squad throughout the most successful period in our history.
"He recently reached the 700-appearance mark, which is testament to his professionalism and dedication as well as his undoubted talent."
Chelsea director Marina Granovskaia added: "We look forward to another year with John at the club, and believe he will be an important figure in the dressing room and on the pitch as we look to bring success back to the club next season."
It had looked as though he had played his last game at Stamford Bridge after the captain cancelled an end-of-season kickabout with his family and friends.
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