The German star's renewal comes just six months to the expiration of his existing deal, which would have made him free agent in the summer.
Ozil's new deal is reportedly worth above £300,000 per week.
Ozil has been linked to various clubs since the 2017 summer transfer window, as both he and Alexis Sanchez were had one year left on their contracts.
However, Arsene Wenger refused not to sell the playmaker in the transfer window, and that decision can be justified with Ozil's renewal.
The departure of Sanchez to Premier League rivals, Manchester United may have annoyed some section of Arsenal supporters.
However, Ozil's renewal will come as good news to Arsenal supporters coupled with the capture of Gabonese goal poacher Pierre-Emerick Aubameyang from Dortmund earlier.
Ozil, who moved to Arsenal from Spanish side Real Madrid in the 2013 summer transfer window, has 88 caps for the German national team.
The creative midfielder has won three FA Cup titles and the Community shield with the Gunners, and was part of Germany's 2014 FIFA World Cup winning team.