Flight VA1528 left Sydney and was beginning its descent into Hobart around 9am when smoke began filling the cabin of the Boeing 737-8FE.
Footage shows the smoke coming from an overhead locker as crew moved passengers away from the danger.
According to those on board, when crew opened the compartment they discovered a lithium battery on fire.
Initial attempts to put the fire out with onboard fire extinguishers were reportedly unsuccessful before water was finally used to extinguish the blaze.
When the plane landed safely, airport firefighters came onboard and removed the bag containing the smouldering battery. One passenger was treated for smoke inhalation.
“Safety is always our highest priority. We appreciate the swift and professional response of our flight and cabin crew, as well as the support of Airservices Australia firefighters,” said a Virgin Australia spokesperson.
