The British & Irish Lion has over 70 European appearances to his name and will line-up for Ireland against Samoa in Dublin on Saturday.
"As players we are so well looked after by both the national and provincial management teams and I feel incredibly privileged to be able to play the sport I love for both Munster and Ireland," said O'Callaghan.
"Munster is my home province and the decision to continue my career here was an easy one when you consider the standard of players in the squad and the incredible support I have received from both the fans and my family.
"My focus now is to try and perform as well as I can to help Munster and Ireland to be successful."
O'Callaghan has won two Heineken Cups and two Celtic League titles in his club career and Ireland head coach Declan Kidney has spoken of his delight to keep the second-row on Irish shores.
"It is very important that we continue to retain players of the calibre of Donncha in Ireland and I am delighted that he has made the decision to remain here," said Kidney.
"I have had the pleasure to work with Donncha through many years of his career and seen him develop into the top class player that he is now.
"His professionalism and work ethic is second to none to the point where he is highly respected by coaches, players, opposition and supporters in equal measure."