Colwill came through Chelsea's academy and spent the last two seasons on loan at Huddersfield and Brighton and Hove Albion.
He played 17 times in the Premier League last season as Brighton finished sixth and qualified for the Europa League.
Colwill's new contract has the option for a further year and he is set to feature heavily in Mauricio Pochettino's squad this season.
"It's always been an easy decision," said Colwill.
"As I've grown up, all I've known is Chelsea. I've spoken with the manager and he's given me reassurance, that trust I needed.
"He's spoken with me not just as a player but a person. It's made a big difference."
Co-sporting directors Laurence Stewart and Paul Winstanley added: "Levi is an outstanding player who has risen to every challenge in his career so far. We are thrilled he will remain at Chelsea for years to come.
"His journey from academy to first team is testament to his talent, dedication, and determination. Everyone at the club is now looking forward to watching him thrive at Stamford Bridge in the seasons ahead."
Earlier this summer, Colwill helped England win the European under-21 championship without conceding a single goal throughout the tournament.
