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It said in a statement on Thursday that Schmidt will become a technical adviser to the company while continuing to serve on its board.
"After ten years as CEO and seven as Executive Chairman, I can't wait to dive into the latest in science, technology and philanthropy," Schmidt said in a tweet.
"I look forward to working with (Google founders) Larry (Page) and Sergey (Brin) on our future here at Alphabet," he tweeted.
"Larry, Sergey, (CEO Google Inc) Sundar (Pichai) and I all believe that the time is right in Alphabet's evolution for this transition.
Larry Page, CEO of Alphabet, praised Schmidt for his long-standing efforts since he joined Google in 2001 for providing the company "with business and engineering expertise and a clear vision about the future of technology".
Alphabet said that its board will appoint a new, non-executive chairman at its next meeting in January.
Google, the world's top search giant, was founded by Page and Sergey Brin in September 1998.
In October 2015, Alphabet became the parent holding company of Google, which has more than 70,000 employees worldwide.