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Genetic gain is characteristically slow when selecting directly for increased grain yield under water‐limited conditions. Genetic increases in grain yield may be achieved through increases in aerial biomass following selection for greater transpiration efficiency (TE as aerial biomass/water transpired). Strong negative correlations between TE and carbon isotope discrimination (Δ) in wheat ( Triticum aestivum L.) suggest that selection of progeny with low Δ may increase TE and aerial biomass under water‐limited conditions. This study investigated how early generation, divergent selection for Δ affected aerial biomass and grain yield among 30 low‐ and 30 high‐Δ, ‘Hartog’‐like, BC 2 F 4:6 progeny and the recurrent, high‐Δ parent Hartog. Lines were evaluated in nine environments varying for seasonal rainfall (235–437 mm) and hence grain yield (1.3–6.2 Mg/ha). Selection for low Δ in early generation progeny was associated with significantly ( P < 0.01) smaller Δ, higher grain yield (+5.8%), aerial biomass (+2.7%), harvest index (+3.3%), and kernel size (+4.8%) in tested lines. Kernel number was the same for low‐ and high‐Δ selected groups. Grain yield advantage of the low Δ group increased with reductions in environment mean yield ( r = −0.89, P < 0.01) and total seasonal rainfall ( r = −0.85, P < 0.01) indicating the benefit of low Δ, and therefore high TE for genetic improvement of grain yield in lower rainfall environments. Narrow‐sense heritability on a single‐plot basis was much greater for Δ ( h 2 = 0.63 ± 0.10) than for either aerial biomass (0.06 ± 0.05) or grain yield (0.14 ± 0.04). Strong genetic correlations between Δ and both aerial biomass ( r g = −0.61 ± 0.14) and grain yield (−0.58 ± 0.12) suggest Δ could be used for indirect selection of these traits in early generations. Selection of low Δ (high TE) families for the advanced stages of multiple‐environment testing should increase the probability of recovering higher‐yielding wheat families for water‐limited environments.