Sparse distribution of rain gauge networks challenges the estimation of rainfall variability over space and time. The SM2RAIN algorithm was developed to estimate rainfall from the knowledge of soil moisture (SM) by inverting the soil‐water balance equation. The algorithm was simplified by neglecting the contribution of evapotranspiration and surface runoff rate during the rainfall event. A recent study developed an analytical model to estimate the net water flux (NWF) from SM data via inversion of analytical Warrick’s equation. In this study, the SM2RAIN-NWF algorithm was developed by integrating the SM2RAIN algorithm and the NWF model to improve the accuracy of rainfall estimation. The applicability of the SM2RAIN-NWF algorithm was evaluated based on observed rainfall data in the Lake Urmia basin, Iran. Satellite SM data was obtained from the Advanced Microwave Scanning Radiometer 2 (AMSR2). The algorithm calibrated based on the data from July 3, 2012, to December 31, 2017, was then used to estimate rainfall for two years extending from January 2018 to December 2019. Estimated rainfall through SM2RAIN-NWF algorithm improved compared to SM2RAIN by 14% and 37.4% increase in the average values of correlation coefficient (R) and Nash–Sutcliffe (NS), and 11.5% decrease in the Percentage Root Mean Square Error (PRMSE) over the calibration period. Validating the estimated rainfall showed a considerable improvement in the performance of the SM2RAIN-NWF algorithm compared to the SM2RAIN algorithm by 8.6% and 30.4% increase in the average values of R and NS, and 13.4% decrease in the PRMSE. It was also found that the SM2RAIN-NWF algorithm contributes to the improvement of error indices in rainfall estimation and simulates the rainfall variation trend in a better fashion than the SM2RAIN algorithm.