End of an era as Bill Gates steps away from Microsoft
New CEO is Indian-born rising star
The software giant, which employs 1,200 people in Ireland, had been expected to appoint Mr Nadella to its top position. However, the change of role for Mr Gates took the tech industry by surprise. Mr Gates is to become a technology adviser to the company.
The announcement ends a long search for a new chief after Steve Ballmer announced his intention to retire in August.
Mr Nadella is only the third chief executive in Microsoft's 39-year history, following Mr Gates and Steve Ballmer.
He has been promoted from executive vice-president of the cloud and enterprise group, a role he was promoted to in July last year by the departing Mr Ballmer.
He received a bachelor of engineering in electronics and communication from the Manipal University in 1988. He has spent almost half his life at Microsoft, largely involved in so-called "enterprise" products that are geared towards businesses rather than consumers.
In his first interview as CEO, Mr Nadella said the way he thought had been shaped by his life's experience, and that he "loves to learn".
"I get excited about new things, I buy more books than I read or finish, I sign up for more online courses than I can actually finish, but the thing about being able to watch people do great things, learn new concepts is something that truly excites me."
Shares of the world's largest software maker were flat yesterday after the announcement.
The appointment comes at a crucial juncture for the company. PC sales, upon which Microsoft relies for much of its income, are in decline. Microsoft has been forced to change its approach, with heavy investments in mobile technology.
Over the past two years it has produced its Surface tablet, bought Nokia's mobile handset business and launched Windows 8, a radical reinvention of its iconic operating system that is designed to allow people to flip easily between tablets and PCs.
Mr Gates will support Mr Nadella "in shaping technology and product direction," Microsoft said.