The England forward played a pivotal role in the club's unsuccessful title push this season, scoring 14 goals in all competitions as well as providing 11 assists.
Saka joined Arsenal as an eight year old and has featured in all of the team's Premier League matches over the past two seasons.
"Dreams don't come true overnight," Saka said in Arsenal's announcement on their social media channels.
"It takes time. This club has been a family to me since I was eight years old. It has given me everything and I have given everything back."
Arsenal manager Mikel Arteta welcomed the new deal, which will reportedly keep Saka in north London until 2027.
"Retaining our best young talents is key to our continued progress and Bukayo represents such an important part of our squad now and for the future," said Arteta.
"As well as being a fantastic talent, Bukayo is a special person, he's loved by us all and he is a credit to himself and his family for the hard work and commitment they have all made to get to this level today."
Arsenal topped the Premier League table for much of the season, but stumbled in the home stretch as Manchester City won their third consecutive title.
