Natural phenomenon of surface and subsurface flow interaction is an intrinsic component of the hydrological processes in any watershed. It is a highly sensitive process, especially in arid and semi-arid regions, and should be considered while dealing with any water management activity in these regions. This paper describes a novel approach for flood routing in an ephemeral channel with compound cross-sections. The proposed mathematical model couples the numerical solution for complete Saint-Venant equations for surface flow with the numerical solution for one-dimensional Richards equation for sub-surface flow through an iterative procedure. Recently developed interactive divided channel (IDC) method is incorporated for simulating the main channel and flood plain flow interactions. In the one-dimensional surface and pseudo two-dimensional sub-surface (1DSP2DSS) model presented here, the effect of lateral variation in infiltration rate at a cross section arising due to (i) lateral variation in flow depth and (ii) lateral variation in soil characteristics is incorporated by considering infiltration into different soil columns for main channel and flood plains. The proposed model is verified by comparing the model results with those available in literature for benchmark problems. Simulations are presented to demonstrate the capability of the model for flood routing in ephemeral channels with flood plains and the effect of lateral variation in infiltration rate on transmission losses. © 2016, Indian Academy of Sciences.