The 28-year-old Brazil international centre-back moved to PSG from AC Milan last year in a deal worth around £34million and was subsequently named captain.
Thiago has since been linked with a move to Barcelona but the new deal with the French champions will keep him at the Parc des Princes until 2018, a development that has delighted club president Nasser Al-Khelaifi.
"We are very proud to extend Thiago's contract, he's an exceptional player both on and off the field," Al-Khelaifi said in a statement.
"He symbolises the aim of PSG to construct one of the top performing teams in Europe."
Thiago was one of the driving forces behind PSG securing their first French title since 1994 and they also reached the Champions League quarter-finals for the first time in 18 years.
Italy midfielder Marco Verratti also recently extended his contract for a year until 2018 to offer a further boost to manager Laurent Blanc.