The team announced the agreement on Twitter.
Davis, acquired from the Miami Dolphins for a second-round pick in 2012, was Indianapolis' top cornerback last season.
He was solid after fellow cornerback Greg Toler went down with a groin injury in Week 7.
Davis, a former first-round pick, had 46 tackles, an interception and tied his career high with 12 passes defended last season.
ESPN.com Colts reporter Mike Wells contributed to this report.