Alternate wetting and drying (AWD) irrigation can save water while maintaining rice yields, but in some countries its adoption by farmers remains limited. Key knowledge gaps include the effect of AWD on early vegetative vigor and its relationship with yield; the effects of AWD on yield and water use efficiency of local cultivars used by smallholder farmers; and the socio‐economic factors influencing current irrigation scheduling. To address these questions, an on‐farm field trial of dry‐season (chaite) rice, comparing two locally important cultivars (Hardinath‐1 and CH‐45) under AWD imposed from 1 week after transplanting to flowering and continuous flooding (CF), was carried out in Agyauli in the central Terai region of Nepal, and triangulated with social research methods exploring the rationale for current irrigation scheduling and perceptions of AWD. Although AWD plots received on average 57% less irrigation water than CF plots, yields did not significantly differ between irrigation treatments, indicating that AWD could considerably enhance crop water use efficiency in this region. In the earlier flowering, more vigorous CH‐45, there were no treatment differences in any yield component while in the later flowering Hardinath‐1, an 11% decrease in filled grain number was compensated by a 14% increase in the percentage of effective tillers per hill. Although leaf elongation rate on the main tiller did not differ between treatments, tillering and green fraction (a measure of canopy closure) were significantly higher under AWD. Surveys established that most local farmers are already using a local adaptation of AWD to modify irrigation volumes, in some cases in response to a limited and unreliable water supply. However, farmers have few direct incentives to reduce overall water use under current water governance, and formal AWD practices are therefore unlikely to be adopted despite their viability as a water‐saving irrigation technique.