Here we have developed a new model to simulate supplemental irrigation and the hydro-economic potential of a rainwater harvesting system in rainfed agricultural areas. Using the model, soil moisture in rainfed crop land, supplemental irrigation requirements, rainwater storage in an on-farm reservoir (OFR) system, and surface and ground water availability were predicted. In an irrigated system, an OFR was used to harvest rainwater during the rainy season, and stored water was applied to cropland as supplemental irrigation (SI). An economic analysis was performed to calculate the benefits due to an OFR irrigation system, and gains from increased crop yield and downstream water availability in the irrigated OFR system were compared with rainfed system (i.e. no OFR). In addition, we calculated the impacts of dry and wet seasons on total value gains (grain and water gains) for irrigated and rainfed conditions and performed a sensitivity analysis to quantify the impacts of model input parameters on total value gains. Analyses showed that the OFR system can produce crop yields three times greater than rainfed agriculture. During a water stress season, the total water use in the irrigated system was 65 % greater than for the rainfed system. Water use efficiency of the irrigated system was 82 % higher than for the rainfed system. In a dry season, the total value gains due to increased crop yield by supplemental irrigation and downstream water availability of the irrigated system were 74 % greater than for the rainfed system, while in a wet season the total value gain of the irrigated system was 14 % greater than for the rainfed system. A precipitation scenario analysis of wet and dry seasons indicated that the benefits of a rainwater harvesting system can be considerably greater in dry seasons than wet seasons.