The top-seeded Federer broke Djokovic's serve early in the first, and twice in the deciding set to cruise to victory in under two hours.
Basel-born Federer was watched courtside by his parents, his wife Mirka and their 15-month-old twin daughters Myla and Charlene.
"It's very emotional winning at home, it makes it extra special. Because I live here and because the fans are behind me," Federer said.
A former ballboy at the tournament, Federer won three straight Swiss Indoors titles from 2006-08 before Djokovic broke the streak when they met in last year's final.
"It's great to have won it after losing last year. It reminded me of last year's match, but (this time) I got off to a great start in the third set," he said.
Djokovic said he lost "a little bit of balance and focus" in the decider.
"You don't get many chances against Roger when he is on top of you. There was no way back," Djokovic said.
Federer's 65th career singles title lifted him above Pete Sampras into outright fourth position in the modern era. Jimmy Connors leads with 109.
"Results-wise, Roger is the best player ever to play the game," Djokovic said in an on-court interview.
Federer is 4-4 in finals this year after winning titles at the Australian Open, Cincinnati Masters and the Stockholm Open.
The 29-year-old Swiss improved to 12-6 lifetime against Djokovic, and 3-1 this year. His only defeat to the 23-year-old Serb this season came in a five-set U.S. Open semifinal match where he wasted two match points.
Both players had to save two break points in their opening service game. Federer broke in the next when a stretching Djokovic netted a backhand, then held for a 3-1 lead.
Federer created a set point with a 199 kilometers (124 miles) per hour ace. Djokovic stayed alive with a forcing backhand then wasted a break chance by firing a forehand long.
Federer clinched the set with a service winner and celebrated by punching the air and shouting in delight.
Djokovic started the second set strongly and broke for a 2-0 lead when Federer's topspin backhand sailed wide.
He was handed a set-point chance at 5-2 when Federer double-faulted, but the Swiss's serve got him out of trouble.
Serving for the set, Djokovic saved a break point with a service winner then delivered another to level the match.
Into the third, Federer made uncharacteristic errors at the net, but led 3-1 after a double fault from Djokovic.
Federer broke again on his third chance in his opponent's next service game.
He held three match points with a deft volley winner at the net, then clinched the win with a backhand winner down the line.
Federer now carries a 57-12 season mark - and No. 1 seeding in the absence with a shoulder injury of top-ranked Rafael Nadal - into the Paris Masters which began Sunday. It's the last event before the eight-man ATP World Tour Finals being held Nov. 21-28 in London.
Djokovic dropped to 2-2 in 2010 title matches, with wins in Dubai and Beijing and a U.S. Open final loss to Nadal.