Allen will earn $3.9 million per season under the new deal.
"Tom has done an excellent job in leading Indiana University's football program and positioning it for an extremely bright future," school president Michael A. McRobbie said in a release.
Allen led the Hoosiers to an 8-4 record in 2019, their first winning season since 2007. Indiana was nationally ranked this year for the first time since 1994, reaching No. 24 in the AP poll on Nov. 10.