The Argentina international moved to the Etihad Stadium on a two-year contract in September 2013 and was a key member of the side that clinched a double of the Premier League and League Cup last season.
Demichelis has gone on to make 30 appearances across all competitions this term and expressed his delight at extending his stay in Manchester.
"I want to say that I am really proud and happy to have extended my contract for another year," he told the club's official website.
"Manchester City is a club with a lot of ambition. We want to grow every year.
"When you get to hold a trophy, it's the best feeling for any player.
"I want to say that I will fight for this club and for my team-mates until the end of my contract. I will fight to try and win titles."
Demichelis endured a challenging start to life in England, but soon established himself alongside captain Vincent Kompany at the heart of City's defence last term.
"We are happy here - my wife and son are happy here. We are trying to improve our English and I think that's a good thing for our future," he added.
"At this stage I am enjoying playing week to week - you can never say what can happen in the future."
