The Pacers announced McMillan's new deal on Tuesday.
"I'm really proud of what Nate and our coaching staff have done," Pacers president of basketball operations Kevin Pritchard said. "Nate is very deserving of this extension. We have a wonderful culture and he has been a big part of implementing that culture. He's a dedicated leader, a very good coach and we're lucky to have him here with the Pacers."
Per ESPN.com's Adrian Wojnarowski, McMillan's new contract runs through the 2020-21 season.
McMillan was entering the final guaranteed year of his original contract with the Pacers. He was hired to take over for Frank Vogel in May 2016.
Prior to being promoted by the Pacers, McMillan was an assistant on Vogel's staff from 2013-16. He spent 12 seasons as head coach for the Seattle SuperSonics and Portland Trail Blazers, making a combined five playoff appearances.
The Pacers have gone 90-74 and made the playoffs in each of McMillan's first two years. Their 48-34 record in last season was their best since 2013-14 when they reached the Eastern Conference Finals.