The deal calls for salaries of $1 million this year, $3.2 million next year, $5.4 million in 2014, $7.4 million in 2015 and $10 million in 2016.
Texas holds an $11 million option for 2017 with a $1.5 million buyout. If the first option is exercised, the Rangers have an $11.5 million option for 2018 with a $1 million buyout. There are additional escalators.
The contract gives Holland, 25, the security of five years of guaranteed money, but the club gets the flexibility to tie him up for three years of his free-agency period. He was slated to become a free agent after the 2015 season.
At Holland's news conference Tuesday morning, he thanked his family and his minor league pitching coaches, who stood in the back as the announcement was made.
"I'm very excited to be a part of this," Holland said. "We've got an unbelievable team, we've got upcoming stars coming up in the organization and I want to be a part of that as well."
To do that, Holland is possibly giving up the chance to get out on the free-agent market sooner.
"I know I gave up that stuff, the three years, but to me it's all about being in Texas and wearing that Texas uniform and going and getting some championships," he said.
Holland, originally from Ohio, intends to purchase a home in Texas.
"The most important thing for me is getting a house in Dallas, being a resident in Texas," he said.
Holland, who became a fan favorite with his mustache and his impressions, was 16-5 with a 3.95 ERA in 198 innings (32 starts) in 2011, taking an important step in his maturation process.
From July 7 on, Holland was 10-1 with a 2.77 ERA in his final 15 regular-season starts, and won 12 of his final 13 decisions.
"The exciting part of this signing is that Derek represents what we try to do in this organization and that's sign and develop kids that come up and can have an impact on a major league ballclub," Rangers CEO Nolan Ryan said. "He represents that. As an organization, we feel really strong about that."
Holland's most memorable outing was Game 4 of the World Series against the St. Louis Cardinals. With the Rangers down 2-1 in the series, Holland threw 8 1/3 shutout innings at Rangers Ballpark in Arlington and allowed just two hits in the Rangers' victory.
Holland likely will begin the season as the club's No. 2 starter behind Colby Lewis.
Texas added Japanese right-hander Yu Darvish during the offseason for a $56 million, six-year deal.
"They're going to be big parts of our rotation, no doubt about that," Rangers general manager Jon Daniels said. "It's certainly about the individual, but it's about our commitment to signing and developing the best pitching we can. It's an organizational mindset. We've tried to turn that corner a little bit and this is further evidence of that."
Holland was selected in the 25th round of the 2006 draft and worked his way through the minors. He was inconsistent as a big league pitcher, with a 6.12 ERA in 33 games (21 starts) in 2009 and 4.08 ERA in 14 games (10 starts) in 2010, going a combined 11-17.
But he showed great life on his fastball and good movement, and the club stayed patient.
"Baseball is full of adversity," Rangers manager Ron Washington said. "There wasn't a time that Derek dealt with adversity that he didn't fight back. That's what I like about him. He's maturing."
It all came together in the second half of last season, and Holland is slated to be a stalwart in the rotation for years to come.
"We said at the beginning of the offseason that one of our goals was to continue to extend some of our core members and keep this group intact for as long as possible," Daniels said. "Derek has done a tremendous job of putting the work in to where he's become part of that core.
"I think we all saw him really start to reach his potential last year, especially in the second half. We're really proud of the work he's put in and looking for continued good things from him and the Rangers for years to come."
Information from The Associated Press was used in this report.