Maddison had been linked with a switch to Manchester United, but the England international has agreed to extend his stay at Leicester after accepting a new deal worth a reported £100,000-per-week ($130,000).
The 23-year-old, who joined Leicester from Norwich in 2018, is now under contract until at least 2024.
“I’m so happy to sign a new contract for this football club,” Maddison told the Foxes’ website.
“It’s an incredibly exciting time to be a Leicester City player with so many positive things happening on and off the pitch and I’m delighted to be part of that.”
With Maddison sidelined after hip surgery for the final weeks of the season, Leicester squandered a chance to qualify for the Champions League via a top-four finish.
They eventually ended fifth to settle for a spot in the 2020/21 Europa League.
Their England left-back Ben Chilwell is reportedly set to join Chelsea.
But Maddison, who scored nine goals in all competitions last season, is convinced Leicester are still set for a bright future under boss Brendan Rodgers.
“What we’ve achieved as a club this season is a huge step forward for us and I know there’s so much more to come from this team,” he said.
“I’ve enjoyed every moment since joining Leicester City. The supporters have been incredible to me and we’ve a fantastic set of players in that dressing room who are determined to show what we’re capable of doing together in both Europe and the Premier League next season.”
Maddison has scored 16 goals in 76 appearances for Leicester and made his England debut against Montenegro last November.
Leicester also announced midfielder Nampalys Mendy had signed a two-year contract extension to take him through to the end of the 2021/22 season.