The new awards are to be given out next year and he expressed the hope that they will help promote an education system that 'nurtures students of all talents and abilities'.
Mr Lee's gift comes from the salary increase of $1.04 million he received last year as a result of the pay adjustments announced in April 2007.
The remaining amount is being donated to a range of community, grassroots, arts and welfare organisations, he said in a statement yesterday.
One of the two new awards recognises post-secondary students 'who have done well both academically and non-academically, and have contributed to the community in enterprising ways', he said.
Students from four clusters - junior colleges, the Institute of Technical Education (ITE), polytechnics, and autonomous universities - are eligible for the Lee Hsien Loong Award for Outstanding All-Round Achievement.
One student from each group will get the award money of $600.
The second award - the Lee Hsien Loong Award for Outstanding Bicultural Students - will recognise top bicultural youth who are conversant in Chinese or Malay. They are able to engage China or regional neighbours - and the West.
This $500 award is for two top students from the Bicultural Studies Programme (Chinese) and one from the Regional Studies Programme.
Bicultural studies is a four-year programme offered by four schools to their Secondary 3 students. They are Hwa Chong Institution, Dunman High, Nanyang Girls' High and River Valley High.
In the Regional Studies Programme, students are offered Malay or Bahasa Indonesia as a third language. They learn about South-east Asian culture and contemporary society.
In his statement, PM Lee underlined the importance of education as the key to success: 'It gives students the opportunity to acquire the skills and knowledge to create better lives for themselves.
'I hope the awards will encourage students to do their best and excel, and help to foster an inclusive education system that nurtures students of all talents and abilities.'
When the salary change was announced in 2007, the Prime Minister had said that he would donate the increases to charity for the next five years.
He set up the endowment fund and the start-up amount of $300,000 came from his 2007 salary increase of about $500,000. The remaining $200,000 went to community, grassroots, arts and welfare groups.
His first two awards were for the less academically brilliant: students who had persevered, done well and made it to ITE and schools that found innovative ways to help Normal course students.
Yesterday, Mr Lee said his latest $500,000 contribution will enable the fund to generate enough interest income to finance all four awards.
A Hwa Chong Institution spokesman said the award 'sends a strong signal to the public on the importance of engaging China, a rising economic superpower'.
Mr Bruce Poh, the ITE director and chief executive, said the award gives prestige to ITE students.
'The presentation of awards to students from the different post-secondary education institutions is also a recognition of the different talents in our midst.'
