He said the move would be to the long-term benefit of Tibetans.
The announcement came in a speech by the Dalai Lama marking the anniversary of the 1959 Tibetan uprising.
“As early as the 1960s, I have repeatedly stressed that Tibetans need a leader, elected freely by the Tibetan people, to whom I can devolve power,” he said in Dharamsala, the Indian town that has become his base.
“Now, we have clearly reached the time to put this into effect.”
He added that his decision was not made because he wanted to “shirk responsibility” or felt disheartened, emphasising that it was in the best interests of the Tibetan people.
When parliament met next week, he would formally propose the constitutional amendments necessary to devolve formal authority to an elected leader, he said.
Correspondents say that whoever replaces the Dalai Lama faces a daunting task, because no other Tibetan comes close to matching his authority as a spiritual and political leader.
They say his move is part of a wider struggle between Dharamsala and Beijing over who succeeds the Dalai Lama.
The Dalai Lama, who heads Tibet‘s exiled government, has lived in Dharamsala since fleeing across the Himalayas following the failed 1959 uprising against Chinese rule.
He has said he does not want independence for Tibet, only meaningful autonomy.
The Dalai Lama is routinely vilified by the Chinese authorities – who he called on in his speech to show more transparency and allow greater freedom of expression.
In Beijing, a Chinese Foreign Ministry spokeswoman described the Dalai Lama’s announcement as trickery.
“He has often talked about retirement in the past few years. I think these are his tricks to deceive the international community,” Jiang Yu said.
“Whatever moves they (the government-in-exile) take – the Dalai Lama’s ‘retirement’ or electing a successor, they will all be illegal and will not be recognised,” China’s state news agency Xinhua quoted him as saying.
Chinese officials have recently announced travel restrictions to Tibet ahead of the third anniversary of riots there.
In March 2008, Tibet witnessed a wave of violent anti-China protests – the worst unrest there for 20 years.
Beijing blamed the unrest on followers of the Dalai Lama, who it said were seeking to separate Tibet from China.
China responded to the unrest with a massive military crackdown.
Many Tibetans have complained about the growing domination of China’s majority Han population in Tibet and accuse the government of trying to dilute their culture.
In the run-up to the anniversary, police in the Indian capital Delhi detained more than 30 Tibetan exiles protesting outside the Chinese embassy on Wednesday.
The protesters wore yellow T-shirts and waved red and blue Tibetan flags, chanting “Free Tibet” and “We want freedom”.
Protests were also reported in the Nepalese capital, Kathmandu, on Thursday with nine people arrested.