It also gave its nod to the Human Resource Development Ministry's plan of creating 20 world-class institutions in the country.
An enabling provision will be made in the Right of Children for Free and Compulsory Education Amendment Bill which will allow states to detain students in class 5 and class 8 if they fail in the year-end exam.
However, the students will have to be given a second chance to improve via an examination before they are detained. The bill will now be placed in Parliament for approval.
The Union Cabinet, which had deferred its decision in June, about creation of 20 world-class institutions in the country, also approved it today.
The University Grants Commission (UGC) had in February passed a new set of regulations to set up 10 world-class institutions in the public sector and as many in the private sector.
Of the 20 universities, first proposed in this year's budget, the 10 state-supported institutions are expected to receive public funding of up to Rs 500 crore each.
HRD's separate rules - UGC (Declaration of Government Educational Institutions as World Class Institutions) Guidelines - allow these institutes to fix their own fees for foreign students and decide salaries for foreign faculty, as well as the freedom to choose admission procedures. Existing universities don't have such freedom and are guided by the detailed UGC rules.
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