The new contract will increase Jones' salary from $2.96 million to $3.6 million per year. It also includes a pay increase for Jones' assistants, the terms of which were not revealed.
Jones took the Volunteers to a 6-6 record this season, and the team's berth in the Taxslayer Bowl will be the first bowl appearance for Tennessee since 2010. In two years as coach, Jones has a 11-13 record, including 5-11 in the SEC.
Tennessee athletic director Dave Hart said that he and Jones began speaking about an extension after the Volunteers' 24-17 victory over Vanderbilt in the final game of the season. Hart added that the two had reached a "handshake agreement" on Friday.
"We have the right man leading out football program at the University of Tennessee," Hart said. "He's an outstanding ambassador for the university."
Hart also praised Jones' abilities and indicated that the coach's relationship with the school was on solid footing.
"Butch Jones is our coach and going to be our coach for a long time," said Hart. "He possesses a very unique skill set. I value our relationship personally and professionally."
Reports have surfaced that there was interest in Jones to fill the coaching vacancy at Michigan, but Jones has denied them on multiple occasions. Hart also said that the extension was not prompted by the possibility that Jones may leave Knoxville.