City coach Pep Guardiola has rewarded the talented 19-year-old striker with a long-term deal on much improved terms.
The Nigerian teenaged scored 14 goals last season even though he was mostly used as a substitute.
Guardiola told the BBC: "Kelechi is a natural goalscorer. I knew about him before, but I've been really impressed with him since I arrived."
He added: "I like his personality, his attitude, his ability - we hope to help him reach the highest level and to realise his full potential."
Iheanacho finished as City's third-highest scorer in all competitions last season, behind Sergio Aguero and Kevin de Bruyne.
The young star was a late substitute in City's 2-1 win over Sunderland on the opening day of the season.