This paper presents an improved guidance algorithm for autonomous underwater vehicles (AUV) in 3D space for generating smoother vehicle turn during the course change at the way-points. The way-point guidance by the line-of-sight (LOS) method has been modified for correcting the reference angles to achieve minimal calculation and smoother transition at the way-points. The algorithm has two phases in which the first phase brings the vehicle to converge to a distance threshold point on the line segment connecting the first two way-points and the next phase generates an angular path with smoother transition at the way-points. Then the desired angles are calculated from the reference and correction angles. The path points are regularly parameterized in the spherical coordinates and mapped to the Cartesian coordinates. The proposed algorithm is found to be simple and can be used for real time implementation. The details of the algorithm and simulation results are presented.