Paddy ecosystems constitute a dominant source of greenhouse gases, particularly of methane (CH₄), due to the continuous flooding (CF) practiced under conventional paddy cultivation. A new management method, namely alternative wetting and draining (AWD) (i.e., flooding whenever surface water levels decline to 15 cm below the soil surface), is an emerging practice developed to mitigate CH₄ emissions while providing an optimal solution for freshwater scarcity. Despite extensive paddy cultivation in Sri Lanka, no systematic research study has been conducted to investigate CH₄ emissions under different water management practices. Thus, field experiments were conducted in Sri Lanka to investigate the feedback of controlled water management on seasonal and diel variation of CH₄ emission, water consumption, and crop productivity. Adopting the same rice variety, two water management methods, continuous flooding (CF) and alternative wetting and draining (AWD), were compared with plants (W/P) and without plants (N/P) present. The emission of CH₄ was measured using the static closed chamber method. The results show a 32% reduction in cumulative CH₄ emission, on average, under AWD when compared to CF. The yield under the AWD was slightly higher than that of CF. Although it was not statistically significant (p > 0.05) there was not any reduction in yield in AWD than in CF. The total water saving under AWD ranged between 27–35% when compared to CF. Thus, the results support (without considering the effect of nitrous oxide) AWD as a promising method for mitigating CH₄ emissions while preserving freshwater and maintaining grain yield in paddy systems.