The 26-year-old Bulgarian moved to Dens Park in January 2015 following his release from Dobrudzha Dobrich in his homeland.
He made 15 appearances in the past campaign and scored his first goal for the club in a derby win over Dundee United in May.
In his first half-season with Dundee, Gadzhalov turned out for the Dark Blues on nine occasions.
Defender Kostadin Gadzhalov has signed a new one-year deal at Dundee.