The Italian was appointed by the Robins in May of last year, and has enjoyed a successful first season in charge at the County Ground.
As well as securing automatic promotion as League Two champions, Di Canio led his side to Wembley in the Football League Trophy final, where they suffered a 2-0 defeat at the hands of Chesterfield.
Chairman Jeremy Wray told the club’s official website: "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 Town fans will join the Board in welcoming this news and that we can all look forward to another exciting and successful season."