The fourth year of the contract is at Lowry's option.
"Toronto is just the right place for me," Lowry told Yahoo Sports.
Securing Lowry, a cornerstone of the Raptors revival, had been general manager Masai Ujiri's No. 1 priority in the offseason, and stands as a coup for a franchise that had struggled in years past to get frontline NBA players to commit long-term.
Lowry stands to become an even more popular and marketable figure in Toronto with his decision to return to the team.
Lowry, 28, had been a free agent target of several teams, including Miami and Houston. In his second full season in Toronto, Lowry had a borderline All-Star season, averaging 17.9 points, 7.4 assists and 4.7 rebounds per game. He led Toronto to the playoffs for the first time in five years, losing in a seven-game series to Brooklyn.