Williamson led New Zealand in 38 Tests, registering 22 wins, 8 draws and 10 losses.
However, Williamson will continue the lead the ODI and T20I teams. New Zealand Cricket (NZC) on Thursday (December 15) confirmed veteran fast bowler Tim Southee will replace Williamson as captain in the longest format.
Southee, who has 346 internationals to his name and has led the T20I side on 22 occasions, will become New Zealand's 31st Test captain when he leads the team on this month's Test tour to Pakistan.
Opener Tom Latham has been appointed as Test vice-captain, after previously leading the side in Williamson's absence.
Kane Williamson led New Zealand in 38 Tests, registering 22 wins, 8 draws and 10 losses.
"Captaining the BLACKCAPS in Test cricket has been an incredibly special honour," Williamson said in a statement.
"For me, Test cricket is the pinnacle of the game and I've enjoyed the challenges of leading the side in the format.
"Captaincy comes with an increased workload on and off the field and at this stage of my career I feel the time is right for this decision.
"After discussions with NZC, we felt that continuing to captain the white-ball formats was preferable with two World Cups in the next two years.
"I'm excited to support Tim as captain and Tom as vice-captain. Having played with both of them for most of my career, I'm confident they'll do a great job.
NZC CEO David White congratulated Williamson on the way he's led the Test side.
"Kane is one of our all-time greats and our priority is to ensure he enjoys his cricket and plays for New Zealand for as long as possible.
"He's a brilliant leader and the success the team has achieved during his time in the longest and arguably toughest format of the game, has been nothing short of remarkable.
"Statistically, he's the most successful Test captain we've ever had - which culminated in the team rising to the number one ICC Test ranking at the start of 2021 and the eventual victory in the ICC World Test Championship Final in June that year."
"Playing for the BLACKCAPS and contributing in all three formats is my number one priority and I'm looking forward to the cricket we have ahead."
New Zealand coach Gary Stead said Williamson had been a fine Test captain.
"Kane's guided the Test team through an immensely successful period which is testament to his ability to bring people together and work towards a common goal," Stead said.
"He's certainly led from the front with his own performances and that was very much the case during our push to win the World Test Championship.
"The Test team has continued to evolve and develop during his time and the fact we've been able to introduce new players and see them thrive almost instantly is a credit to Kane and his leadership.
"We hope by lessening his workload we can continue to see the best of Kane Williamson for longer on the international stage, and we know he will remain a key leader in this group."
(With NZC Inputs)