Smith fired a stunning nine-dart finish in one of the greatest legs in the history of the World Championship during the early stages of the final with van Gerwen.
The 32-year-old, a two-time runner-up including a painful defeat to Peter Wright 12 months ago, hit darting perfection in the second set and continued to produce some mesmeric scoring as he won one of the greatest finals ever 7-4 that left him in tears of joy.
He became just the second player to hit a nine-darter in the World Championship final and the first since Adrian Lewis in 2011 as he took his place in the history books.
In taking his maiden title at the third attempt he also became world number one and gained revenge for the 2019 final defeat to Van Gerwen.
That was the last time the Dutchman won the showpiece and it needed brilliance from Smith to deny him this time around as 'Bully Boy' rattled off four successive sets to secure his path to glory.
Van Gerwen was the heavy favourite for a fourth title after a brilliant year and an even better tournament, where he averaged over 100 in every round up to the final.
But he faltered at the last hurdle as after playing his part in an incredible opening to the match, where he missed an attempt at a nine-darter before Smith threw his, his level dropped off, allowing his opponent to race to the promised land.
There were fears it might go the other way after Van Gerwen took the opening set against the throw, but those were quickly washed away after one of the greatest legs in the tournament's history in the second set.
On Van Gerwen's throw, both men launched incredible nine-dart attempts and it was Smith who landed it.
Van Gerwen had the first chance at perfection as he hit eight brilliant set-up darts, but was millimetres out with his attempt at double 12.
Smith, throwing second, was right behind him, though, and made no mistake, following eight successive treble 20s with the prized double 12 to send the crowd wild.
It levelled the match up at 1-1 as one of the best finals in the 30-year history of the PDC tournament unfolded.
Van Gerwen may have missed out on the nine-darter but he threw a 10-dart leg in what could have been a pivotal fifth set, which he took against the throw to lead 3-2.
But Smith rallied and immediately returned fire to level at 3-3 and then produced a brilliant 130 checkout to rescue the seventh set and go 4-3 ahead.
He was in the zone and quickly took the next two in a run of four sets in a row to put daylight between him and Van Gerwen for the first time.
Smith may have had flashbacks to last year's final defeat to Wright where he squandered a 5-4 lead after Van Gerwen stopped the rot to make it 6-4 and then led 2-0 in the next set.
But with the help of a 106 checkout, he regained control winning the last three legs to claim the title amid emotional scenes.