The scarcity of water is the most severe constraint for the development of agriculture in arid and semi-arid areas. Under such conditions, the need to use the available water economically and efficiently is unquestionable. The important strategy for increasing water productivity and improving water use efficiency in the area of water scarcity was deficit irrigation. A field experiment was conducted at Mehoni Agricultural Research Center during offseason aimed at investigating the effect of deficit irrigation levels on water productivity of onion (Bombey Red variety) and the most sensitive growth stages of onion crop. The experiment was carried out in split plot design with sixteen treatment combinations and three replications. The treatments include four growth stages (initial, development, bulb formation and maturation) as main plot, and three deficit irrigation levels (80%, 60% and 40% of evapotranspiration of crop (ETc)), and one control irrigation of 100% ETc as subplot. Crop water requirement was estimated using actual daily climatic data. The result showed that deficit irrigation levels, time of deficit irrigation and their interaction had significant (p< 0.01) effect on bulb yield and yield components. The treatment received 100% ETc at the time of development stage gave the highest total bulb yield of 30.67 t/ha with no significant difference from 60% deficit treatments during initial and maturation stages. The result showed that initial and maturation stages were the right time to practicing deficit irrigation without significant yield reduction. Water productivity was the highest with 60% deficit irrigation at maturation stage (8.96 kg/m3), and 0.17ha additional area to be irrigated by saved water. The yield response factor (Ky) was higher (1.98) when 40% deficit occurred at development stage. The result revealed that onion bulb yield was most sensitive to water deficit that occurred at development and bulb formation stages. While maximum yield was obtained when the whole crop water requirement was applied, implementing deficit irrigation at appropriate stage could increase the irrigated area as a result of high water productivity.