In this study the economic benefits from micro irrigation in the Eastern Dry Zone of Karnataka are estimated using primary data collected from a sample of 45 drip irrigation farmers (DIF) and 45 conventional irrigation farmers (CIF) drawing groundwater from irrigation wells. The size of holding in DIF (CIF) was 3.48 acres (2.77 acres). The major crops on DIF (CIF) were mulberry and grape (mulberry and tomato). Investment per functioning well in DIF (CIF) was `1,66,223 (`1,31,551) because DIF had higher rate of well failure. The well failure rate for DIF (CIF) was 33 per cent (19 per cent). The annual negative externality cost was higher on DIF (`8404) compared to CIF (`4590). Groundwater extracted per farm in DIF (CIF) was 60 acre inches (94 acre inches). The net returns per acre inch of groundwater, net returns per rupee of water cost on DIF (CIF) were `457, `2.80 (`194, `1.20). Using the intercept and slope dummy in the net returns function, it was found that by adopting drip irrigation the net returns per farm increased from `15,292 to `25,203 and the marginal productivity of water increased from `465 to `1960. Using discriminant function, to find the explanatory variables that differentiate the DIF and CIF, it was found that variables such as cropping intensity, water used (acre inches) and net returns per acre inch of water were the discriminant variables. Hence the government policy needs to be oriented towards these variables to motivate farmers to adopt drip irrigation. In addition, it is essential to promote irrigation literacy to enable farmers to use water efficiently.