The Dalai Lama, 75, has been Tibet's spiritual and state leader, although since 2001 Lobsang Tenzin, 71, also known as the Samdhong Rinpoche, has been prime minister of the government in exile, with final authority over political matters.
But the Dalai Lama said he wanted to make the spiritual-state distinction clearer.
"As early as the 1960s, I have repeatedly stressed that Tibetans need a leader, elected freely by the Tibetan people," the Dalai Lama said in Dharamsala, India, on the 52nd anniversary of the failed 1959 Tibetan uprising against Chinese rule. "Now, we have clearly reached the time to put this into effect."
His decision "has nothing to do with a wish to shirk responsibility," said the Dalai Lama, whose religious name is Tenzin Gyatso. "It is to benefit Tibetans in the long run. It is not because I feel disheartened."
He said he trusted "that gradually people will come to understand my intention, will support my decision and accordingly let it take effect," he said.
The Dalai Lama said he would begin the formal process of stepping down at a meeting of the Tibetan Parliament in exile Monday.
Chinese Foreign Ministry spokeswoman Jiang Yu told The New York Times Beijing saw his plans as "his tricks to deceive the international community."
The Tibetan Parliament's Monday meeting coincides with the third anniversary of the March 2008 uprisings that erupted into riots across China's Tibetan plateau after the suppression of a peaceful protest by monks in Lhasa, Tibet's administrative capital.
Beijing at the time accused the Dalai Lama of orchestrating the unrest, a charge the Dalai Lama denied, saying it was a result of widespread Tibetan discontent.
China this week temporarily banned foreigners from traveling to the region.
The Dalai Lama has said he does not want independence for Tibet, only meaningful autonomy.
Lobsang Sangay, a Tibetan legal scholar and an expert on international human-rights law, currently at Harvard University, is the front-runner for prime minister, with "wide popularity among young Tibetans," the Times said.