The deal announced Saturday also includes a club option for 2017. The extension replaces a 2015 club option.
The 31-year Escobar played in a career-high 153 games and made 149 starts last season for the Rays. After establishing club records with a .989 fielding percentage and 53 consecutive errorless games at shortstop, he was a finalist for the American League Gold Glove Award.
"He's a really, really good player at a position that's extremely scarce around the game," Tampa Bay executive vice president of baseball operations Andrew Friedman said.
Escobar brought up the idea of an extension with Friedman during spring training.
"I really do feel happy here," Escobar said through an interpreter. "I think it's one of the best things that ever happened in my career. Fortunately we were able to do something and get this contract."
Over the previous three seasons, Escobar's .982 fielding percentage at short ranks third in the majors -- with at last 400 starts -- behind Baltimore's J.J. Hardy (.988) and Philadelphia's Jimmy Rollins (.983).
Last season Escobar hit. 256 with nine home runs, 56 RBIs and a career-high 27 doubles. He was acquired from Miami on Dec. 4, 2012, for infielder Derek Dietrich.