The versatile defender, who can play right-back and centre-back, moved to Goodison Park from League One side Barnsley in January 2013 for a fee reported to be in the region of £3 million.
Stones enjoyed a fine campaign for the Merseyside club last season, making 26 appearances and earning international recognition with England.
The 20-year-old was named on the standby list for Roy Hodgson's squad for the World Cup in Brazil and his impressive form has seen him linked with the likes of Arsenal, Chelsea and Tottenham.
However, Stones is thrilled to be continuing his development with Everton.
"I am over the moon. It's just been such a great last season and to get pen to paper on a new deal is a dream come true," Stones told Everton's official website.
"The last 12 months have been so enjoyable thanks to the faith that the manager has shown in me and all the players. What we achieved was unbelievable. It was a very memorable season and hopefully there's more to come."
Stones joins Ross Barkley and Seamus Coleman in signing a new deal at Everton and manager Roberto Martinez is elated to see another talented youngster put pen to paper.
"It is an important signing for the club and a really good reward for a young footballer with a fantastic future," Martinez added.
"He had an excellent season in 2013-14 and it's really good news all round.
"It is very important that we continue to let our youngsters continue to develop into bigger roles."
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