"Arvind Subramanian will continue for one more year after completion of his three year tenure on October 16," Finance Ministry said in a tweet.
Earlier there were reports that Mr Subramanian had submitted his resignation to the government, which was denied by the ministry officials.
He has been quite vocal in his stand on RBI's monetary policy and spoken openly about the need for a rate cut.
Mr Subramanian's extension comes at a time when the country's economy has slumped to a three-year low of 5.7 per cent in the first quarter of the current fiscal year.
The announcement comes a day Finance Minister Arun Jaitley has promised a series of steps to bolster growth and has been meeting officials in the ministry.
Mr Subramanian, a former US-based economist, was named to the position in 2014 after his predecessor Raghuram Rajan quit the position in September 2013 after being appointed the Governor of the Reserve Bank of India (RBI).
Being the key advisor to Finance Ministry Arun Jaitley, he has been instrumental in suggesting some key reforms. The Chief Economic Adviser is a main go-to person for advice for the Finance Minister on macro-economic matters, and primary responsibilities, among others, include authoring the mid-year analysis and the Economic Survey.
Chief Economic Adviser Subramanian graduated from St Stephen's College, Delhi, and got an MBA from the Indian Institute of Management, Ahmedabad. He obtained M.Phil and D.Phil from the University of Oxford, UK.