Molecular diversity of microglia, the resident immune cells in the CNS, is reported. Whether microglial subsets characterized by the expression of specific proteins constitute subtypes with distinct functions has not been fully elucidated. Here we describe a microglial subtype expressing the enzyme arginase-1 (ARG1; that is, ARG1 microglia) that is found predominantly in the basal forebrain and ventral striatum during early postnatal mouse development. ARG1 microglia are enriched in phagocytic inclusions and exhibit a distinct molecular signature, including upregulation of genes such as Apoe, Clec7a, Igf1, Lgals3 and Mgl2, compared to ARG1 microglia. Microglial-specific knockdown of Arg1 results in deficient cholinergic innervation and impaired dendritic spine maturation in the hippocampus where cholinergic neurons project, which in turn results in impaired long-term potentiation and cognitive behavioral deficiencies in female mice. Our results expand on microglia diversity and provide insights into microglia subtype-specific functions.