Parlange and Brutsaert [1987] derived a modified Boussinesq equation to account for the capillary effect on watertable dynamics in unconfined aquifers. Barry et al. [1996] solved this equation subject to a periodic boundary condition. Their solution shows the significant influence of capillarity on watertable fluctuations, which evolve to finite-amplitude standing waves at the high frequency limit. Here, we propose a new governing equation for the watertable, which considers both horizontal and vertical flows in an unsaturated zone of finite thickness. An approximate analytical solution for periodic watertable fluctuations based on the new equation was derived. In agreement with previous results, the analytical solution shows that the unsaturated zone’s storage capacity permits watertable fluctuations to propagate more readily than predicted by the Boussinesq equation. Furthermore, the new solution reveals a capping effect of the unsaturated zone on both the amplitude and phase of the watertable fluctuations as well as the watertable overheight. Due to the finite thickness of the unsaturated zone, the capillary effect on watertable fluctuations is modified mainly with reduced amplitude damping and phase shift.