The 57-year-old guided the Seagulls to third in his first full season as boss, missing out on automatic promotion to the Premier League on goal difference.
Albion were then beaten by Sheffield Wednesday 3-1 on aggregate in their play-off semi-final tie on Monday.
"Chris thoroughly deserves this new contract after such an outstanding season," said chairman Tony Bloom.
"He has done an exceptional job since he took over as manager."
Former Newcastle and Norwich manager Hughton was appointed Brighton boss on 31 December 2014 and helped the Sussex club avoid relegation from the second tier last season.
The Seagulls started the 2015-16 campaign with a club-record 21-match unbeaten run and finished the season on 89 points - the club's highest points total in the second tier.
Brighton's third-placed finish - their highest in the league since the club were relegated from the top flight in 1982-83 - prompted Hughton to be named Championship manager of the year by the League Managers' Association on Monday.
"He has instigated an outstanding turnaround in our fortunes on the pitch," added Bloom. "There is no doubt he is one of the best and most skilful managers in the country.
"We are delighted to be going into next season with Chris at the helm as we aim to realise our ultimate aim of reaching the Premier League."