Di Canio has enjoyed a successful debut season in his first managerial job, leading the Robins to the League Two title and the final of the Johnstone's Paint Trophy at Wembley.
Speaking at a press conference on Wednesday afternoon where the news was announced, Swindon chairman Jeremy Wray said: "Paolo has been a spectacular success in his first year of club management.
"From the outset he has given assurance of his commitments to Swindon, as long as we had a shared goal of reaching the Championship within three years.
"Having agreed the budget for the upcoming season, the board has every confidence that Paolo will deliver this goal within the period of his new contract.
"I am sure all Swindon fans will join the board in welcoming this news and that we can all look forward to another exciting and successful season."