Sustainability of traditionally cultivated rice in the rice-wheat cropping zone (RWCZ) of Pakistan is dwindling due to the high cost of production, declining water resources and escalating labour availability. Thus, farmers and researchers are compelled to find promising altatives to traditional transplanted rice (TPR). A field study was conducted in Punjab, Pakistan, in 2017 and 2018 to explore the trade-offs between water saving and paddy yield, water productivity and economics of two aromatic rice varieties under dry direct seeded rice (DDSR) and TPR. The experiment was comprised of three irrigation regimes on the basis of soil moisture tension (SMT) viz., continuous flooded (>–10 kPa SMT), altate wetting and drying (AWD) (–20 kPa SMT) and aerobic rice (–40 kPa SMT), maintained under TPR and DDSR systems. Two aromatic rice verities: Basmati-515 and Chenab Basmati-2016 were used during both years of study. In both years, DDSR produced higher yields (13–18％) and reduced the total water inputs (8–12％) in comparison to TPR. In comparison to traditional continuous flooded (CF), AWD under DDSR reduced total water input by 27–29％ and improved the leaf area index (LAI), tillering, yield (7–9％), and water productivity (44–50％). The performance of AWD with regard to water savings and increased productivity was much higher in DDSR system as compared to AWD in TPR system. Cultivation of DDSR with aerobic irrigation improved water savings (49–55％) and water productivity (22–30％) at the expense of paddy yield reduction (36–39％) and spikelet sterility. With regard to variety, the highest paddy yield (6.6 and 6.7 t ha–1) was recorded in DDSR using Chenab Basmati-2016 under AWD irrigation threshold that attributed to high tiller density and LAI. The economic analysis showed DDSR as more beneficial rice establishment method than TPR with a high benefit-cost ratio (BCR) when the crop was irrigated with AWD irrigation threshold. Our results highlighted that with the use of short duration varieties, DDSR cultivation in conjunction with AWD irrigation can be more beneficial for higher productivity and crop yield.