The Chiefs announced the deal but didn't disclose terms, although a source said the contract covers four seasons. ESPN and various media reports have the extension worth about $68 million.
"It was a priority of ours to get this deal done and keep Alex in a Chiefs uniform long-term," Kansas City general manager John Dorsey said in a statement. "Alex is a proven leader on and off the field. He is a special individual with a lot of ability, and we are fortunate to have him here."
The Chiefs acquired Smith last year in a trade with the San Francisco 49ers for second-round draft picks in 2013 and 2014. Smith has one year remaining on his current deal, so the extension keeps him in Kansas City through 2018.
Kansas City now has its franchise tag to give to linebacker Justin Houston after this season. Houston has just one year left on his current contract. If Houston and the Chiefs don't get a deal done, the tag would be a likely option.
Smith threw for a career-best 3,313 yards and 23 touchdowns last year in his first season as the Chiefs' starter. Smith, 30, had one year left on a contract that was set to pay him $7.5 million this season.
Coach Andy Reid said the Chiefs are happy to have Smith moving forward, according to a statement from the team.
"Alex is a smart, talented football player that has adapted well to our offensive scheme," Reid said. "He also, obviously, has had a tremendous amount of success as a quarterback in this league. We as a team are very happy to have Alex as our quarterback moving forward."
Though the Chiefs lost in the first round of the playoffs last season, Smith set playoff-game franchise records with 46 attempts, 30 completions, 378 yards and four touchdowns in the 45-44 shootout against the Colts.
Smith has done particularly well protecting the ball over the past three seasons, as only 1.5 percent of his passes have been intercepted, according to ESPN Stats & Information. That is tied for the best mark in the NFL over the past three seasons with Aaron Rodgers.
ESPN NFL Insider Adam Schefter and Field Yates contributed to this report.