The 32-year-old, who has spent seven years at the club, has won the Champions League, the Premier League title, the League Cup and the FA Cup four times during an illustrious career.
It had been suggested that he would leave Stamford Bridge at the end of the season, but he has revealed his delight at finally putting pen to paper.
"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," he told the club's official website.
"I have been able to fulfil 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."
Cole has made 293 appearances for the club.