The 18-year-old has yet to make his competitive debut for the Blues but impressed on loan with Watford last season as they lost out on promotion to the Premier League to play-off winners Crystal Palace.
Chalobah had just one year remaining on his existing contract and, having secured his long-term future with the club, the versatile England youth international is now targeting chances in the first team.
"It is great for me that Chelsea are willing to give me such a long contract, it is a big confidence boost," he told the club's official website.
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"Watford was a great experience; I learned about playing in front of a crowd every game and so many other lessons that there are too many to list.
"Training with Jose Mourinho and the Chelsea squad this pre-season, every session has been different with something new to take on board. I've enjoyed it a lot."
Despite not playing competitively for the first-team squad, the Sierra Leone-born youngster, who can play in defence or midfield, featured during the club's pre-season tour of Asia and Jose Mourinho says that he is "very impressed" with what he has seen.
"He's a very, very good player and I like him very, very much," the Blues boss enthused. "I am very impressed. For sure he is a Chelsea player."