The 26-year-old Egypt international joined the Reds from Roma last summer and has scored 44 goals in 52 appearances for the club. His new deal, which runs until 2023, does not contain a release clause.
“It demonstrates two things very clearly – his belief in Liverpool and our belief in him,” said Liverpool manager Jurgen Klopp.
Salah was the top scorer in the Premier League last season as he netted 32 top-flight goals – the most by a player in a 38-game season – to win the Golden Boot.
His performances also helped him win last season’s Professional Footballers’ Association Player of the Year award and Football Writers’ Association Footballer of the Year.
“I think this news can be seen for what it is; rewarding a person who performed and contributed greatly for the team and the club last season,” said Klopp.
“We want world-class talent to see they have a home at Anfield where they can fulfil all their professional dreams and ambitions – we are working hard together to achieve this.
“When someone like Mo Salah commits and says this place is my home now, it speaks very loudly I think.
“Equally, our commitment to him says we see his value and want him to grow even more and get even better within our environment.”