Having joined The Citizens from Shakhtar Donetsk in 2013, the 36-year-old has featured 350 times, winning 12 trophies including four Premier League titles and six EFL Cups.
Fernandinho was linked with a move back to his homeland Brazil but insisted he has unfinished business at City after signing the new deal.
"In my head and my mind, the job is not done yet," said the midfielder.
"And so that's why I decided to stay here another year and try to help the team and the club to achieve the goals that they're looking for.
"In my point of view, we can do that, there’s still places to improve and to get those targets. And obviously, for me and for my family it’s a pleasure to stay in Manchester for one more year.
“If I can keep doing the same way, leading them inside the pitch, off the pitch, to help them to improve and get better and to perform better during the games, I would be the most happy person there."
Fernandinho whose new contract will see him don the Manchester City shirt until the end of 2021/2022 season has now scored 24 goals in his eight-year stay at City.
The Brazilian midfielder played an integral role in Pep Guardiola's side that won their third Premier League title in four years and reached the Champions League final for the first time in the club's history.
Manchester City will begin their Premier League title defence when they visit Spurs at the Tottenham Hotspurs stadium on August 15.
