Improved daily precipitation and temperature data at 5 × 5‐km grids for 1960–2015 were developed for the Upper Yarkant basin (UYB) based on observations of precipitation gradients and temperature lapse rates. The developed climate data are then used to drive the VIC‐Glacier hydrological model to simulate the runoff process for the UYB. A large altitudinal dependence is observed in both precipitation and temperature, with three altitudinal patterns of precipitation gradient for the elevation bands of <2,000 m, 2,000–3,000 m, and >3,000 m, respectively, and a strong seasonal variation in temperature lapse rate ranging from 0.4 to 0.8 °C/100 m. Basin precipitation and temperature data are greatly improved in both amount and spatial variations after the orographic adjustments. Glacier melt runoff is the dominant water source of the UYB accounting for about 52% of annual total flows, followed by snowmelt (about 26%), and rainfall runoff (about 22%). About 60% of basin runoff originates from the high altitudes (>5,000 m), and about 32% and 8% of runoff originate from middle (4,000–5,000 m) and low (<4,000 m) altitudes, respectively. The variations in annual runoff in the UYB were mainly controlled by glacier melt runoff, middle and high altitudes, and temperature in warm seasons during 1965–2015. However, rainfall and snowmelt runoff, and low altitudes, were playing an increasingly important role in total flow variations of the UYB due to the increase of warm season temperatures in 1994–2015 and precipitation in the entire simulation period.