The Brazil international has made 126 appearances for the London club since moving to Stamford Bridge from Internacional two years ago.
Oscar, 23, has scored 27 goals for Chelsea, including four this season, and has been a regular in the starting line-up under Jose Mourinho.
And the playmaker did not hesitate to extend his stay at the club which he helped to win the UEFA Europa League in his first season in England and will be expected to add more honours over the coming years.
"I am so happy because I love playing for Chelsea and living in England," he told the club's official website.
"I have enjoyed playing here for two years, and now I have five more, so I am very happy."
During his time at Chelsea, Oscar has also made the step up to become a regular for Brazil, starting in seven matches during their World Cup as the hosts finished fourth.
‘He instantly popped into our ratings as one of the best U21 midfielders in Europe. The impressive thing is Slot has made him into more of a no.6' Inside Ryan Gravenberch's transformation at Liverpool
‘I don’t think Liverpool would look at Ollie Watkins, a striker isn’t a pressing issue for them – it’s Arsenal who need one’ Former Reds star explains why his old club don’t need an out-and-out forward this summer
