Tax-saving deposit scheme to fund loans to students, educational institutions

13 May 2010, 0413 hrs IST,economic times  Bureau

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Students aspiring to become doctors, engineers, fashion designers and software engineers.

The human resource development ministry discussed the proposal with the Planning Commission last week, and in the next one month, the concept will be crystallised, minister Kapil Sibal told ET.

Investments in deposits under the proposed First Education Savings Scheme (FESS) will be eligible for tax exemption similar to the public provident fund or life insurance premium, said an official in the ministry who did not wish to be named. Savings under the scheme will be collected by commercial banks and transferred to the proposed National Education Finance Corporation (NEFC) for refinancing educational loans at concessional rates. Banks will transfer deposits under the scheme every month and get a commission for their services.

Based on the Planning Commission’s feedback, the ministry of human resource development will prepare a formal note and circulate it to various arms of the government including the finance ministry before it will be sent to the Cabinet for approval. FESS is just one of the instruments suggested by the HRD ministry to raise funds for the proposed corporation, said a Planning Commission official who did not wish to be named. “We agree with HRD ministry about the need to focus on secondary and higher education to strengthen our gains in primary education,” he said.

The total fund requirement for secondary and higher education is estimated at around Rs 10, 94,000 crore by 2020. The ministry expects the corporation to meet a little more than one-fourth this requirement.

NEFC will be set up with an initial equity capital of Rs 5,500 crore. The ministry proposes to infuse Rs 3,000-crore equity capital in the company every year with the aim of generating Rs 35,500 crore by 2020.

Besides equity, NEFC will raise funds through public deposits, domestic borrowings, grants, donations and bonds and debentures.

NEFC will refinance education loans at an interest rate as low as 4% to students aspiring for higher education. Interest rates for education loan currently vary between 10% and 12%. It will also refinance loans extended to educational institutions and universities at 2% below the prime lending rate.

Mr Sibal had told Parliament on March 5 that his ministry is planning to set up NEFC to refinance loans besides funding educational infrastructure and expand institutions.