If you downloaded the game using the itch io App, then you'll get the update automatically. Otherwise, you have to download the game again. If you're using the same PC, then your save files will be preserved. If you lose your save files, you can quickly play episodes 1 and 2 by using the "skip unseen text" in the settings menu and clicking "skip" button that is visible on the bottom of the screen.
Episode 3 starts automatically after the final scenes of episode 2 (a little after the scene that says "Save your game now").
Episode 3 has v0.3.0 written at the right bottom corner of the main menu.