Schmeichel's previous deal at the newly promoted Premier League side was due to expire at the end of the month, but he has now penned fresh terms.
The Denmark international was an ever-present last season as Leicester booked their return to the top flight, with the 27-year-old only conceding 43 Championship goals.
"I'm tremendously proud to sign for this great club again," he told Leicester's official website.
"I was always confident that my future would be sorted once we achieved our objective of winning promotion to the Premier League and I'd like to thank the owners and the manager for making it happen.
"I can't wait to play for this club in the Premier League."
Schmeichel, who joined Leicester from Leeds United in 2011, has played in the Premier League before for Manchester City, but he was limited to only eight appearances as back-up at the Etihad Stadium.
Manager Nigel Pearson believes keeping Schmeichel shows the ambition within the club to push forward in the future.
Pearson said: "Kasper has been as driven as anyone to help take this club back to the Premier League and now that we have achieved that, he fully deserves the opportunity to play at that level.
"A player of his quality will have had a number of options available to him, but he wants to remain part of what we're doing at Leicester, which says a lot for where we're going as a football club."
