Hamilton West voters are set for a by-election within a year of the 2023 general election after Dr Sharma's dramatic exit, which he has blamed on his former party.
Dr Sharma says he decided to resign on Tuesday after catching wind of moves from Labour to invoke legislation that would force him from parliament.
The rule, known as "waka-jumping", allows party leaders - in this case Ms Ardern - to require MPs to leave parliament should they cease being a member of their party.
In a lengthy Facebook post, which begins with a bright pink graphic stating "I have resigned", Dr Sharma explains he wanted to resign now rather than leave his constituents without representation, as is possible under the rules.
"I have decided to resign from Parliament pre-empting Labour's next step," he said.
"This will trigger a by-election, giving the people of Hamilton an opportunity to not lose their democratic rights of having a voice in parliament by underhanded tactics of the government and the Labour Party."
However, Ms Ardern has suggested Dr Sharma has jumped at shadows, denying Labour was going to invoke the rule.
"We have not, and are not, considering invoking the waka jumping provisions, nor do I know the basis of Gaurav Sharma's speculation," Ms Ardern said.
Dr Sharma said members of Labour's council had tipped him off, denying to name who they were.
The latest chapter of Dr Sharma's unedifying parliamentary career was a surprise to all on Tuesday, but it is in keeping his capricious reputation.
A first-term backbencher elected in the Labour landslide in 2020, the 35-year-old accused senior figures of his own party of bullying in an opinion piece for the NZ Herald in August.
Within a fortnight, he was censured and expelled by the Labour caucus, with Ms Ardern citing lost trust and repeated breaches of party rules.
In the two months since, Dr Sharma has continued to levy attacks against Labour, sitting alone in parliament as its only independent MP.
In announcing his resignation, he said he would form a new party and re-contest the seat.
Ms Ardern said it would be an expensive mistake.
"Gaurav may wish to reconsider his decision given he is unnecessarily costing the taxpayer hundreds of thousands of dollars to trigger a by-election he then intends to stand in," she said.
"We consider it unnecessary and wasteful given the general election is scheduled for 2023."
The by-election will be an unwanted distraction for Ms Ardern, given Labour's previous affiliation to Dr Sharma and her party's slumping support.
More than 50 per cent of Kiwis voted Labour in the 2020 election, but they now trail opposition National in public polling.
The Hamilton West electorate was held by National from 2008 to 2020 and the centre-right party will be favoured to win the byelection.
Deputy Prime Minister Grant Robertson admitted being caught by surprise by Dr Sharma's resignation but Labour campaign chair, Energy Minister Megan Woods said Labour said they would be ready to fight a byelection.
"Our campaign planning for next year's general election is well underway. It's a machine that is always ready to go," she told AAP.
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