The former Chelsea and England captain spent his final season as player at Villa in 2017-2018, losing in the Championship play-off final to Fulham.
Terry returned to Villa Park when Dean Smith was appointed as Steve Bruce's successor last October and this time helped the club back to the Premier League, winning at Wembley in May.
The 38 year-old has committed his future to Villa ahead of its return to top-flight action.
"I am really pleased that JT has extended his current deal as he is a pleasure to work with," Smith said. "We have had a successful start to our Villa coaching careers and JT has been instrumental in joining myself, Richard O'Kelly and Neil Cutler.
"He has complemented the team that we have and I have no doubts he will go on to be a top manager in the years to come.
"Our focus now is on the coming season and to try to continue the progress we have had in the past eight months."
Terry was linked to the Middlesbrough manager's job following Tony Pulis' departure at the end of last season but insisted he was staying patient.
Jonathan Woodgate was subsequently appointed at Boro, including former Tottenham and LA Galaxy striker Robbie Keane on his staff.
Terry's ex-Chelsea team-mate Frank Lampard is reportedly the front-runner for the leading role at Stamford Bridge, having impressed with Derby County, which was beaten by Villa in the play-off final last month.