Garcia has played a key role for Diego Simeone's men this season, helping them move into the last 16 of the UEFA Champions League and occupy third in the La Liga table - level on points with Barcelona and Real Madrid.
The 27-year-old has scored 15 goals in 33 appearances in all competitions and is delighted to have committed his future to the club.
He told the club's official website: "I am very happy with the agreement. Both the club and I wanted to tie it up because I'm very comfortable here.
"Now I'll just keep working to achieve the objectives with the group. Things are going very well and we will work to continue in this run."
Garcia's contract extension is a timely boost for Atletico, who face Milan in the first leg of their last 16 Champions League clash at San Siro on Wednesday.
Jose Luis Perez Caminero, Atletico's sporting director, is delighted such a key player has opted to prolong his stay at Vicente Calderon.
"Raul has earned his renewal with a lot of good work. He's been a very consistent player the last two seasons," he said.
"He is one of the strongest men in the changing room and the proof is that this season he is one of three captains.
"He provides both defensive and attacking option. We are very pleased with this agreement, and we hope he’ll continue here for many more years."
