The idea is simple: instead of that expense hitting your budget as one large, disruptive lump sum in the month it's due, you divide the expected cost by the number of months until it's needed and set that smaller amount aside automatically each month. A ₹24,000 annual insurance premium becomes a much less noticeable ₹2,000 a month, sitting in a separate savings account until it's actually due.
This is different from your emergency fund, which is meant for unplanned, unpredictable expenses. A sinking fund is for planned, predictable ones — the distinction matters because mixing the two often means the emergency fund gets quietly drained by things that were never really emergencies, just poorly timed.
Setting up two or three sinking funds for your most predictable large annual expenses — insurance, taxes if you're not on full TDS coverage, and one discretionary category like travel — is often enough to smooth out the months that otherwise feel unexpectedly tight for entirely predictable reasons.