Smart, 47, a former assistant coach on the team, took over from fired head Coach Paul Westphal in January and guided the squad to a 20-39 record.
The terms of deal weren't announced but The Sacramento Bee reported it was for two years.
"Keith's extension gives us the stability we need to continue the development of our team," Kings President of Basketball Operations Geoff Petrie said. "He has the commitment, energy and vision necessary to succeed in building a winning team. We are all looking forward to working with him as we pursue an exciting and productive future."
"We're trying to get our franchise moving in the right direction," Smart said. "The goal is to keep moving in that positive direction, and I'm glad that I get that opportunity."
Smart, 47, joined the Kings after serving as Golden State's head coach in 2010-11.