I want to upgrade Splunk Enterprise Version from 126.96.36.199 to 8.1 on a stand alone environment.
Please suggest me the steps to perform this migration.
Also my current python version is 2.7. Please suggest if there is any need to upgrade the python version to 3.7 as well or 2.7 will also work for Splunk Enterprise Version 8.1.
The wonderful people on the Splunk Documentation team have written a manual on the subject. Give it a read at https://docs.splunk.com/Documentation/Splunk/8.1.0/Installation/HowtoupgradeSplunk
That process is explained in the same manual. You will need to review your apps to make sure they are compatible with Python3. If it's a third-party app then downloading the latest version from splunkbase should be all you need to do. If the latest version is not ready for Python3 then contact the app developer.
You will have to make your own apps compatible with Python3. This only matters if you have python code in your app(s). I like to use the Splunk Upgrade Readiness App to find apps that are not compatible with Python3. The same app will recommend changes you can make to ready the files for Python3.
As @richgalloway pointed you to use Splunk platform readiness app to check all your apps/inputs etc. to ensure that those are working with python3. It tells to you if there is something to fix and what this is or are those already compatible.
My preferred way it to install first a test environment (e.g. with trial license) with same apps etc. and then check those with it. Then fix what is needed, run again and deploy those fixes to production. Then run (at least) once again that check within production environment. Then follow that installation guide to do the actual upgrade.