The resignation comes a day after the Kerala High Court dismissed Chandy's petition challenging a report of the Alappuzha district collector on alleged encroachments by a company in which he has stake.
This is the third minister in the Vijayan cabinet to resign after the LDF government came to power in May 2016.
Earlier, A K Saseendran of the NCP had resigned after a sleaze audio clip with a woman went viral and E P Jayarajan (CPI-M) quit on nepotism charges.
NCP had only two MLAs.
The resignation letter was handed over to the chief minister by NCP state President, T P Peethambaran Master, after consulting the matter with party's national leadership.
Chandy, who left for Alappuzha, after attending the cabinet meeting, told a Malayalam television channel that even though the chief minister did not seek his resignation and there were no circumstances for the same, a coalition partner's (CPI) "adamant" stand made the chief minister to ask him to "rethink."
Earlier, talking to reporters after cabinet meeting, Vijayan said the issue had been left to the NCP's national leadership.
A businessman-turned politician, Chandy, had been facing heat since the past few days as allegations surfaced that his company had violated rules to construct a parking area and a road through a paddy field to his Lake Palace resort in Alappuzha district.
Alappuzha District Collector, T V Anupama had in her report to the state government stated that large scale violations of Kerala land conservation Act and Conservation of Paddy land and Wetland Act had been committed by the resort.
There was a violation of the collective cabinet responsibility by the minister, it had held.
Opposition Congress-led UDF and BJP had been on a warpath since the past one month demanding Chandy's resignation over the encroachment allegations.
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