Ibrox boss Mark Warburton revealed two months ago that he hoped to tie the 21-year-old deal on improved terms after his Light Blues rebirth.
But McKay - who looked to be out of the picture under previous boss Ally McCoist when he was sent out on loan to Morton and Raith - has now killed off suggestions that talks had stalled by agreeing a deal to the summer of 2018.
It is just reward for the pacey wideman, who has been netted six times in 33 outings so far this season.
The Scotland Under-21 international said: “It means a lot and it shows everyone how far I’ve come in the past year to earn myself a new deal which I am happy to sign.
“I was there when the journey back started and hopefully now we are going to finish it, and seeing it through will be a great personal achievement.
“I made my debut when I was 17 and the change in me from then to now has been massive, and I feel the manager and Davie Weir have given me a lot of confidence this season.
“They have been great with me and I have a lot to thank them for.”
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