With the population growth through natural growth and migration, coupled with the city expansion, it is the fact that Dehradun City in India faces severe water scarcity. Therefore, the Song Dam Drinking Water Project (SDDWP) is proposed to provide ample drinking water to Dehradun City and its suburban areas. This paper examined economic significance and environmental impacts of the SDDWP in Garhwal Himalaya, India. To conduct this study, we collected data from both primary and secondary sources. There are 12 villages and 3 forest divisions in the surrounding areas of the proposed dam project, of which 3 villages will be fully submerged and 50 households will be affected. For this study, 50 heads of the households were interviewed in the 3 submerged villages. The questions mainly focused on economic significance, environmental impacts, and rehabilitation issues of the dam project. The findings of this study indicate that economic significance of the dam project is substantial, including providing ample water for drinking and irrigation, contributing to groundwater recharge, creating job opportunities, and promoting the development of tourism and fisheries in the Doon Valley. In terms of the rehabilitation of the affected people, there are only 50 households in need of rehabilitation. Currently, the arable land of these affected people is not sufficient to sustain their livelihoods. The entire landscape is fragile, rugged, and precipitous; therefore, the affected people are willing to rehabilitate to more suitable areas in the Doon Valley. Moreover, it is essential to provide them with sufficient compensation packages including the compensation of arable land, houses, cash, common property resources, institutions, belongingness, and cultural adaptation. On the other hand, the proposed dam project will have adverse environmental impacts including arable land degradation, forest degradation, loss of fauna and flora, soil erosion, landslides, and soil siltation. These impacts will lead to the ecological imbalances in both upstream and downstream areas. This study suggests that the affected people should be given sufficient compensation packages in all respects. Afforestation programs can be launched in the degraded areas to compensate for the loss of forest in the affected areas.