"I'm delighted. This is the place I want to be and the club I want to work at," McDermott told the club website.
"I've been here close to 11 years and I feel part of things. Now we look to the rest of the season, we've got nine games to go and much to play for."
The ex-Arsenal apprentice added: "I'd like to thank the chairman, the board and Nick Hammond, and I'm also fortunate to have fantastic staff and players. As a club we have continuity, it's a great place to work and a great place to be."
McDermott took on the managerial position at Madejski Stadium after then Royals boss
Brendan Rodgers left by mutual consent
having left the club just one place clear of the Championship relegation zone.
Brian McDermott's star is rising and being on a rolling contract suits both parties, it protects the club's position and rightly rewards him for his performance
Reading chairman Sir John Madejski
The former Fulham and Oxford United player has since led Reading into the quarter-finals of FA Cup for the previous two seasons in a row and inspired a seven game unbeaten run at the end of the last league campaign to secure a ninth place finish.
Royals chairman Sir John Madejski added: "Brian has done a magnificent job for Reading Football Club, and I am absolutely delighted with this agreement.
"We were rightly proactive in approaching him with this new contract, his star is rising and being on a rolling contract suits both parties, it protects the club's position and rightly rewards him for his performance.
"I have complete faith that under Brian's management both the team and the club will continue to move forward and we are very well placed for now and indeed the future."
Reading are currently three points below the Championship play-off places in seventh having lost just eight of their 37 games this season.
Source: BBC Sport
Source: BBC Sport