The move follows a pledge by President Hassan Sheikh Mohamud in March to end a complex indirect system that has been in place since 1969.
"The basic principles should be that the election of the Federal Somali Republic must be one that gives the public the opportunity to cast their votes democratically in a one-person, one-vote system," the government said after reaching an agreement with state leaders.
The reform aims to "encourage the multiparty political system" that is independent and "corruption free," it added.
The Somali government also agreed to abolish the post of prime minister, which is currently held by Prime Minister Hamza Abdi Barre.
The new reforms in Somalia will also include a shift to a two-party political system in which "only two political parties will compete democratically for the people's votes," according to the Somali National News Agency (SONNA).
Somalia is struggling to emerge from decades of conflict and chaos, while battling a bloody Islamist insurgency and natural disasters, including a punishing drought that has left millions facing hunger.
The country has not held nationwide one-person, one-vote elections since 1969, when General Siad Barre seized power.
Instead, clan affiliations have been the organizing principle of Somalia's politics, with influential roles such as speaker, prime minister and president divided among the main groups.
State legislatures and clan delegates also pick lawmakers for the national parliament, who in turn choose the president.
But rivalries among the clans have resulted in decades of strife and political wrangling, which in recent years have been exploited by Al-Shabaab* militants aligned with Al-Qaeda*.
*terrorist groups banned in Russia and other countries