The former Huddersfield Town midfielder helped the club to promotion from the Championship in his first season at Turf Moor - scoring nine goals in 49 appearances.
Having initially signed a two-year contract, the Scot will now remain under contract with the Lancashire club until 2017.
Ahead of his first taste of top-flight football, Arfield revealed manager Sean Dyche was a major factor in his decision to sign the extension.
"We had a great year last season and this is a club is going in the right direction so I'm made up to be a part of that," he told Burnley's official website.
"I felt like I was getting back to my best last season and a massive factor behind that was because I was enjoying my football and I felt I could go out and express myself.
"We've got a great bunch of lads and there is a real togetherness in the squad, with everyone pulling in the same direction.
"Obviously it is going to be a tough season ahead but if we stick together and work as hard as we did last year then I think we can have a successful season."
As well as signing the likes of Marvin Sordell, Michael Kightly and Steven Reid, Burnley have also agreed fresh terms with Dyche and long-serving defender Michael Duff in recent weeks.
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