The present study investigated whether an irrigation system could be established to save water and increase grain yield to enhance water productivity by proper water management at the field level in irrigated lowland rice (Oryza sativa L.). Using two field-grown rice cultivars, two irrigation systems; conventional irrigation and water-saving irrigation, were conducted.In the water-saving irrigation system, limiting values of soil water potential related to specific growth stages were proposed as irrigation indices. Compared with conventional irrigation where drainage was in mid-season and flooded at other times,the water-saving irrigation increased grain yield by 7.4% to 11.3%, reduced irrigation water by 24.5% to 29.2%, and increased water productivity (grain yield per cubic meter of irrigation water) by 43.1% to 50.3%. The water-saving irrigation significantly increased harvest index, improved milling and appearance qualities, elevated zeatin +zeatin riboside concentrations in root bleedings and enhanced activities of sucrose synthase, adenosine diphosphate glucose pyrophosphorylase, starch synthase and starch branching enzyme in grains. Our results indicate that water-saving irrigation by controlling limiting values of soil water potential related to specific growth stages can enhance physiological activities of roots and grains,reduce water input, and increase grain yield.