"It's always important to win and with a top team such as Bayern, you can win," the Dutchman told reporters in Basel, where his team face Swiss champions FC Basel in Tuesday's Champions League match.
Van Gaal cited his excellent relationship with the squad as a reason for continuing.
"I couldn't ask for anything more," he said, also extending thanks to the board. "I had some difficult times at the start and the club directors showed trust and this allowed us to get to the Champions League final in Madrid (in May)."
He also said his wife enjoyed life in Bavaria. "My wife loves Munich and the feeling of life which the city breathes," he said.
Van Gaal, who took over in the summer of 2009, steered Bayern to the domestic championship and Cup double as well as the Champions League final in his first season in charge.
Bayern, however, have suffered a bad start to the current campaign and are in ninth place on eight points after six games after a 2-1 home defeat by leaders Mainz 05 on Saturday.
"We like doing things that are unexpected," club director Karl-Heinz Rummenigge told reporters in Munich. "Everyone can extend contracts after victories. But it is a good public sign to reinforce the position of the coach after a defeat."
The 59-year-old former Barcelona and Netherlands coach took over last year after steering AZ Alkmaar to the Dutch title.
Bayern stormed through the domestic titles after a rocky start and lost in the Champions League final to Inter Milan and the contract extension does not come as a real surprise.
Club officials and Van Gaal had been hinting for weeks a new deal was pending.
