Abstract Irrigation water management in the paddy cultivation area under the left bank canal of the Kaudulla reservoir (Kaudulla tank) in the North Central Province of Sri Lanka has become a serious issue due to limited water availability and inefficient water distribution infrastructure at present. Insufficient storage capacities of the village tanks in the cultivation area, low rainfall during some months and regulated inflow from the transbasin diversion to Kaudulla tank have had a significant impact on yield in the two cultivation seasons of the year. In this article, modernization of irrigation infrastructure in the command area was investigated for effective utilization of limited available water. The results of the calibrated and validated Hydrologic Engineering Centre - Hydrologic Modeling System (HEC-HMS) model and Crop Water and Irrigation Requirements Program (CROPWAT) model were used with Water Evaluation and Planning Model (WEAP) to evaluate the water balance and demand to identify the best investment for improving irrigation water supply to maximize the return. Economic analysis was carried out using the net present values for different modernization options. Accordingly, the construction of a new canal system and augmentation of the capacities of village tanks from the present total capacity of 3.8–20 MCM was found to be the most appropriate option. This intervention will increase the income from yield by 205 million with a payback period of 12 years in the Yala season.