The 24-year-old has won the UEFA Conference League and the FIFA Club World Cup since joining the club from Manchester City in 2023.
"Chelsea means a lot to me, and I think the club is going in the right direction, so I'm delighted to sign, and I'm obviously very happy," Palmer said.
"Speaking to the owners, to the sporting directors and obviously the manager, they gave me a lot of confidence, so it was only right to sign.
"Speaking to players as well, everyone has the same ambitions. I feel like we win major trophies here consistently and I want to be a part of that and play a big role in it too."
Chelsea have agreed long-term contracts with several first-team players and emerging talents.
Forward Joao Pedro recently signed a deal through 2034, and winger Pedro Neto agreed a six-year contract last month.
Chelsea, 10th in the Premier League table, host Bournemouth on Saturday.
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