Croatia captain Modric, who turns 41 on Wednesday, has been playing for the national team since 2006, earning over 200 caps and helping them reach the 2018 World Cup final.
"Luka's decision makes me extremely happy, we are all aware what he brings to Croatia, both on and off the pitch," said Slaven Bilic, who returned for a second spell as Croatia manager after the team exited this year's World Cup in the round of 32.
Modric, who spent the majority of his career at Real Madrid, joined AC Milan last year.
Croatia will visit the Czech Republic, host England and play Spain twice in the Nations League between September 26 and October 6.