The 35-year-old striker ranks second all-time in goals for the Spanish club.
Karim Benzema, who has won the most awards for Real Madrid, will depart the team after 14 years.
The 35-year-old French striker Benzema became Real's second-highest scorer of all time, after Cristiano Ronaldo, with 353 goals in 647 games and 25 championships won during his stint in Madrid.
According to a club statement from the Spanish behemoths, "Real Madrid and our captain Karim Benzema have agreed to end his brilliant and unforgettable period as a player for our club."
"A player who is already one of our greatest legends is someone for whom Real Madrid would like to express its gratitude and admiration.
"Karim Benzema has exemplified our club's principles throughout his Real Madrid career, which has been a model of professionalism and decorum. Karim Benzema has a right to select his own path in life.
"Madridistas and all football fans around the world have loved his enchanted and distinctive style of play, which has elevated him to the status of one of the greatest icons of our team and a legendary figure in the game.
"Real Madrid is and will always be his home, and we wish him and all of his family the best in this new stage of his life."
The current Ballon d'Or and UEFA Player of the Year, Karim Benzema, transferred from Lyon to Real in July 2009 for a rumored 35 million euro transfer fee.
His trophy collection in Spain includes five Champions Leagues, five Club World Cups, four European Super Cups, four LaLiga championships, three Copas del Rey, and four Spanish Super Cups. He ranks fifth on the list of players with the most Real appearances.
Al-Ittihad of Saudi Arabia has been mentioned as a potential destination for Benzema.
Real have announced that on Tuesday, in the Spanish capital, and in the presence of the club's president Florentino Perez, they would organize "an institutional act of tribute and farewell" to Benzema.
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