The former Republic of Ireland manager was appointed Ipswich boss on a two-and-a-half-year deal in November 2012 after leaving his post as Wolves manager nine months earlier.
Despite taking over a side who were bottom of the Sky Bet Championship and winless in 12 matches, McCarthy guided them to 14th that season, eight points off the play-off positions.
The 55-year-old continued that improvement last season as Ipswich finished ninth in the table, just four points off the play-offs.
Speaking to Sky Sports News, McCarthy, whose assistant Terry Connor has also signed a new three-year deal, said: "I'm delighted because I am enjoying my time here.
"We have made progress and we want to continue making progress and hopefully we can build on our little bit of success from last season.
"The players are back in today. I don't go in for big speeches, more of a welcome back to them and everybody starts with a clean slate. This is an opportunity for some of them who didn't get their chance last season.
"Prove it to me between now and August the ninth. The team will be picked based on the best throughbout pre-season, who is the fittest, strongest and in the best form."
The news comes two days after Ipswich completed the permanent signing of young winger Alex Henshall from Manchester City following a successful loan spell last season.
Ipswich begin the new season at home to Fulham on August 9 followed by an away trip to Reading.
Be interesting to see if the Ipswich can improve on the good season they had last season, the mighty Roy Keane fail is finally out of their systems so it would be nice to see the Blues maybe challenge for that 5 year plan of getting into the Premier League.- dannyjohnson