The 37-year-old has been in charge at Ashton Gate for the past three years. The Robins missed out on a place in the play-offs this season by four points.
Chief executive Mark Ashton said on the club's website, www.bcfc.co.uk: "I'm thrilled Lee has committed his future to the club. The positive impact he's already had is clear to see.
"I've worked with him for more than three years now and on a daily basis I witness first-hand his attitude, passion and professionalism towards the football club, which is fantastic to see. He follows the same vision as the club, which is vital, and we will continue to work together to deliver our ultimate goal of promotion to the Premier League."
Johnson played 199 games for City between 2006 and 2012 before entering management at Oldham and then having a spell in charge of Barnsley.
His achievements as City manager include reaching the Carabao Cup semi-finals last season and this year's eighth-place finish in the Championship.
Johnson said: "I'm delighted to have signed a new deal at Bristol City. I'm really looking forward to continuing the journey in our mission for success."
