The proposal requires the government to receive a court order to access telecom companies' records.
The NSA is understood to collect daily call records from specific telecom firms and to keep them for five years.
The plan follows widespread anger after leaks revealed the full extent of US surveillance operations.
"I believe this approach will best ensure that we have the information we need to meet our intelligence needs while enhancing public confidence in the manner in which the information is collected and held," Mr Obama said in a statement on Thursday.
Under the new proposal, the government will reportedly only seek specific records that telecom companies possess.
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The government must gain approval from a secret surveillance court - proving there is a reasonable suspicion that a phone number is connected to a terrorist - in order to access the record.
An agency may conduct a search without prior approval in cases of emergency, though it remains unclear what constitutes an emergency under the proposal.
The telecom companies will be required to search for specific numbers of a limited time period.
The government previously had the ability to search for numbers only distantly linked to a suspicious number, but would now be limited to accessing only a specific number and direct contacts.
Documents leaked by former NSA contractor Edward Snowden have revealed the US collects massive amounts of electronic data from communications of private individuals around the world, and has snooped on foreign leaders.
In a speech in January, President Obama said it was necessary for the US to continue collecting large amounts of data, but that civil liberties must be respected.
The Obama administration has said it plans to renew the current NSA programme for at least another 90 days until Congress passes the new bill.
New legislation has also been developed separately by leaders of the House intelligence committee that would allow the NSA to issue subpoenas for specific phone records without prior judicial approval, the New York Times reports.
President Barack Obama has asked Congress to end bulk collection of US phone records by the National Security Agency (NSA).