The 22-year-old England forward joined Chelsea from Manchester City on September 1 last year and enjoyed a stellar Premier League season as he contributed to 33 goals, scoring 22 times.
The fresh terms see Palmer extend his previous contract by a further two years, a reward for his breakthrough campaign at Stamford Bridge.
In total, he registered 25 goals and 15 assists in 45 appearances across all competitions.
Palmer made the switch from Manchester City last summer for an initial fee of £40m with £2.5m due in potential add-ons.
Palmer is among the England contingent who are behind their club counterparts in their pre-season preparations.
Chelsea boss Enzo Maresca must decide whether or not to use him from the start against his former club City this Sunday, live on Sky Sports.
His exploits at Euro 2024 mean he only returned to Chelsea last week following a holiday.
But Maresca has already deployed him as a second-half substitute in the 1-1 friendly draw with Inter Milan at Stamford Bridge.
After facing City on the opening weekend of the Premier League season, Chelsea face a Conference League play-off against Servette or Braga four days later.
It is the latest piece of business the club have done during another busy summer.
Ten summer signings so far, and £185.4m spent, with more set to come. Twenty players have also gone out the door, with Chelsea dominating the headlines of yet another transfer window.
With new boss Maresca heading into his first season in charge in west London, Chelsea are continuing to add to what is surely one of the biggest Premier League squads ever assembled.
There are growing questions from supporters over the club’s strategy to return to the top and, here, Sky Sports tries to break down the situation at Stamford Bridge with Chelsea’s Premier League season opener against Man City, live on Super Sunday on Sky Sports (kick-off 4.30pm), just days away.
