Gruden, who turned 50 on Saturday, had two years left on the five-year contract signed in January 2014. He led the team to back-to-back winning seasons for the first time since 1996-97.
The extension was struck Saturday night at dinner in Indianapolis, where the NFL Scouting Combine is currently taking place, NFL Network's Ian Rapoport reported.
Owner Daniel Snyder and team president Bruce Allen decided to make the move now, rather than wait until the next offseason to evaluate Gruden's situation, according to the Washington Post. The deal was first reported by ESPN's John Keim.
Gruden has a regular-season record of 21-26-1 in three seasons with the Redskins, including winning the NFC East title in 2015.
The Redskins also are hoping to sign quarterback Kirk Cousins to a long-term deal before the July 15 deadline. The club placed the exclusive franchise tag for the second time on Cousins (guaranteeing him a $23.94 million salary for 2017) earlier in the week.