Groundwater overexploitation has been cited as one of the biggest threats to rural drinking water in India, but there is very little quantitative evidence on the risks to source sustainability. In this paper, we aim to understand (1) the extent of actual groundwater depletion and its impact on rural water supply systems, (2) the primary driver of groundwater depletion and (3) the additional financial burden in finding new sources for water supply, relying on temporal data from two Gram Panchayats (local administrative unit) in the Upper Arkavathy watershed near Bengaluru, in south India. Study results confirm that groundwater depletion, in this hard rock aquifer region, is a severe problem, driven largely by agricultural water abstraction. Rural water supply systems have had to catch up continuously with the falling water table, abandoning non-functional wells and drilling new borewells to replace them. This has resulted in a major financial burden to the Gram Panchayats. Hitherto, state and central government grants have paid for rural well installation in India, but the increased pumping costs associated with declining groundwater levels impose a major burden on the Gram Panchayat, many of which are severely in “electricity debt”.