Putin, who has been in power either as President or Prime Minister since 2000, also proposed a two-term limit on the Presidency and tighter residence qualifications for top posts, both in the political sphere and the judiciary.
In his State of the Nation address to the State Council, he said a nationwide referendum should be held on these proposals, which will weaken the power of the Presidency, the post he holds till 2024.
In his over an hour-long address, Putin also focussed on domestic issues, calling for tackling the rising levels of poverty and corruption.
Also highlighting the demographic crisis the country was facing, he announced a number of cash incentives for Russian families, including increases in child benefit, free hot lunches for school kids, and 50 per cent increase in grants to mothers of large families.
He, however, did not speak about sanctions the country faced or foreign issues, not even mentioning Ukraine.
The address was telecast live and special screens were put up at various public places, drawing large crowds who listened avidly to him.
Reacting to the speech, analysts said that this seems to be a way to enable Putin stay at the helm, after he finishes his fourth Presidential term in 2024.
Hours after his speech, Prime Minister Dmitri Medvedev announced that he and his government had submitted their resignations, Russian media reported.
"In this context, it is obvious that, as the government, we must provide the President with a capability to make all decisions, which are required to implement the proposed plan," Medvedev said.
Accepting the resignation, Putin asked the ministers to function as a caretaker government until a new one is formed.
Before announcing their resignation, Medvedev met Putin for discussions, the Kremlin's press office said.
Putin also said that he plans to create a position of Deputy Secretary of Russia's Security Council, and offer it to Medvedev.
( With inputs from IANS )