Russell is one of the Premiership's star names and his continued time at Bath will give the league a boost.
It comes after Saracens re-signed Owen Farrell from Russell's former club Racing 92 earlier this week, with the likes of Marcus Smith and George Ford also staying in the league despite the lure of riches in France and Japan.
"The way the club is developing and with the young players coming through, the belief and confidence that we've got week-to-week is just growing," Russell added.
"There are some brilliant new signings coming in as well who will be great additions to the club, and I can't wait to get started next season."
Russell is believed to be one of the league's best-paid players, reportedly earning £1m a season as Bath's non-salary cap player.
Bath head of rugby Johann van Graan says the club has secured one of the best global talents.
Van Graan said: "It's amazing news. Finn is one of the world's best 10s, a player who performs in the big moments and more importantly he's an incredible team man and a family man.
"He is one of the lads, his training is exceptional, and he's added so much to our group.
"It's great that he'll be staying on at Bath Rugby and continuing his journey with the Blue, Black and White."
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