The study was carried out to design payment for ecosystem services (PES) scheme to enhance the effectiveness of existing drinking water supply project. This study determined willingness-to-pay of water users using choice experiment method and identify the willingness of watershed households to participate in the scheme by household survey. The results suggest that creating a multi-stakeholder institution at the local level, led by local body, will make the implementation of the PES feasible. This would create trust between ecosystem managers and service consumers, facilitates monitoring system and encourages their participation in watershed management. In the beginning, water users would like to pay less than their willingness-to-pay because it may take time to improve the situation. This suggests that community-based payment for ecosystem services scheme in rural area can be kicked off, only after the external support this is because the amount committed by water users are not sufficient to implement all required activities and ecosystem managers will not make an investment expecting that they will be paid in the future. The study also recommends providing upstream communities in-kind support rather than cash may reduce the transportation cost as well as risk of corruption. This also ensures that the fund is spent on planned activities.