The institute will be registered under the Societies Registration Act, 1860, and will work as an entity under the Department of Empowerment of Persons with Disabilities.
The Cabinet also approved a proposal to create three Joint Secretary-level posts, including one post of institute Director and two posts of Professors.
The three-year budget for the institute includes non-recurring expenses of Rs 128.54 crore and recurring expenditure of Rs 51 crore.
"The main objectives are to provide rehabilitation services to persons with mental illness, capacity development in the area of mental health rehabilitation, framing of policy and advanced research in mental health rehabilitation," a government statement said.
The institute will conduct 12 courses that offer diploma, certificate, graduate, postgraduate, M.Phil degrees in the area of mental health rehabilitation. It is expected to take in 400 candidates in five years.
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