The midfielder, who turned 25 today, has a buyout clause that remains at 150 million euros (£130m).
Busquets is an unsung hero of the Barcelona team and has made 238 first-team appearances.
"Sergio Busquets has been given the perfect birthday present," read a statement.
"The director of the football area, Andoni Zubizarreta, has told a press conference on Tuesday that the midfielder will be staying at Barca until June 30 of the 2017/18 season with the option of an additional year."
Barca have been quick to tie down one of their star assets after selling versatile midfielder Thiago Alcantara to European champions Bayern Munich this week.
Cesc Fabregas' future is also up in the air after Manchester United submitted an offer for the former Arsenal captain yesterday.
Therefore, the decision to offer Busquets, who is a first-team regular alongside Xavi and Andres Iniesta in midfield, a new deal will appease most Barca fans.