Thursday, May 13, 2010

Tax-saving deposit scheme to fund loans to students, educational institutions - Scheme may be tax exempt like PPF

The government is drawing up a tax saving bank deposit scheme that will raise funds for cheap loans to educational institutions and students aspiring to become doctors, engineers, fashion designers and software engineers. The Ministry of Human Resource Development (MHRD) discussed the proposal with the Planning Commission last week ,and in the next one month, the concept will be crystallised, minister Kapil Sibal told The Economic Times.
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, hinted an official in the ministry. 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 Commissions feedback, the MHRD will prepare a formal note and circulate it to various arms of the government including the Ministry of Finance before it will be sent to the Cabinet for approval. FESS is just one of the instruments suggested by the MHRD to raise funds for the proposed corporation, said a Planning Commission official who did not wish to be named. We agree with the MHRD 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 (Rs. 10940 billion) by 2020. The MHRD 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 (Rs. 55 billion). The ministry proposes to infuse Rs. 3,000-crore (Rs. 30 billion) equity capital in the company every year with the aim of generating Rs. 35,500 crore (Rs. 355 billion) 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.

Source: The Economic Times, May 13, 2010

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