Grealish's performances in the 2019/20 season were a key factor in Villa narrowly avoiding the drop, with him subsequently linked with a transfer away from Villa Park.
Although Manchester United had previously registered an interest, their main transfer target for a role on the wing remains Jadon Sancho of Dortmund, while they have already purchased Donny van de Beek from Ajax.
Arsenal were reportedly interested, too, but Villa remained firm on their £40m+ asking price.
Any rumours of a move away have now been silenced with the news of his contract extension.
"I am delighted to make this commitment to Villa," Grealish told the official club website.
"It is my club, my home and I am very happy here.
"The owners have made it very clear to me how ambitious they are and how they want to build Aston Villa. There are exciting times ahead and I am very glad to be part of it."
Villa chief executive Christian Purslow said that the club always intended to build their Premier League team around their captain.
"We are determined to build a top team around him and are delighted he is extending his contract and committing himself to the club he loves," he said.
While most Premier League teams kicked off their campaign at the weekend, Villa have had to wait until the second round of fixtures for their opening match due to Manchester City's participation in the latter stages of the Champions League.
With that match postponed, their opening Premier League match will be against Sheffield United next Monday.