Transforming growth factor β (TGF-β) is a crucial cytokine with pleiotropic functions on immune cells. In CD4+ T cells, TGF-β is required for induction of both regulatory T and Th17 cells. However, the molecular mechanism underlying this differential T cell fate decision remains unclear. In this study, we have evaluated the role of Smad3 in the development of Th17 and regulatory T cells. Smad3 was found to be dispensable for natural regulatory T cell function. However, induction of Foxp3 expression by TGF-β in naive T cells was significantly reduced in the absence of this molecule. On the contrary, Smad3 deficiency led to enhanced Th17 differentiation in vitro and in vivo. Moreover, Smad3 was found to interact with retinoid acid receptor-related orphan receptor γt (RORγt) and decrease its transcriptional activity. These results demonstrate that Smad3 is differentially involved in the reciprocal regulatory and inflammatory T cell generation.