The Serbian will be bidding to win his 11th Grand Slam championship and will face the winner of Friday's semi-final between Andy Murray and Milos Raonic.
Djokovic has won the trophy in four of the past five years and is a five-time winner overall. Federer, a four-time champion at Mebourne Park, fell in the semi-finals for the fifth time in the past six years.
"I played unbelievable in the first two sets," Djokovic said after the match.
"It was necessary against Roger, who was playing at a very high level during this tournament, only dropping one set. I knew he would be aggressive. I came out with the right intensity and executed everything perfectly. The two-set lead was comforting, but it was a battle in the end. At the end of the day, it's important that your convictions are stronger than your doubts."
Djokovic dazzled in the first set, committing just two unforced errors, compared to 12 from Federer.
Djokovic broke in the first game and lost only one point behind his first serve as he raced through the opener.
The 17-time Grand Slam winner Federer tried to halt Djokovic's momentum at the start of the second set, saving a break point to hold serve with a roar. But Djokovic didn't flinch.
In the Swiss' following service game, the Serb broke twice to seal a two-set lead.
Djokovic made just six errors in the first two sets, compared to 22 from the World No.3 and did not face a break point.
But Federer did not bow quietly. He saved a break point in the fifth game before going on the attack in Djokovic's service game.
He received majority of the crowd support on the Rod Laver Arena. The Swiss was thwarted on his first four break points of the match, but not on his fifth.
He then held on to his serve in the ninth game to let claw his way back into the match.
Djokovic, however, kept up the pressure and it ultimately told on Federer in the eighth game of the fourth set.
Djokovic broke Federer's serve, forcing the 34-year-old to an unforced error. He then held on to his service and claimed victory in two hours and 19 minutes.