The multi-tone frequency modulation (FM) signal transferred through track circuit in automatic train control (ATC) system is analyzed. A digital filter with ideal sloping shape in frequency domain is designed for frequency discrimination. With this filter, the FM signal is converted into AM-FM signal by frequency-to-amplitude conversion. The modulating signal is finally extracted from the envelope of the AM-FM signal. Simulations show that the digital demodulation method could accurately recover the modulating signal in low signal noise ratio (SNR) circumstance, and has good performance in suppressing interference of harmonics of traction current frequency. The feasibility of the proposed method is proved in a hardware system based on SHARC DSP.