Summary: By extending Darcy’s law to the dry domain above the free surface and specifying the boundary condition on the potential seepage surfaces as Signorini’s type, a partial differential equation (PDE) defined in the entire domain of interest is formulated for non-steady seepage flow problems with free surfaces. A new parabolic variational inequality (PVI) formulation equivalent to the PDE formulation is then proposed, in which the flux part of the complementary condition of Signorini’s type in the PDE formulation is transformed into natural boundary condition. Consequently, the singularity at the seepage points is eliminated and the difficulty in selecting the trial functions is significantly reduced. By introducing an adaptive penalized Heaviside function in the finite element analysis, the numerical stability of the discrete PVI formulation is well guaranteed. The proposed approach is validated by the existing laboratory tests with sudden rise and dropdown of water heads, and then applied to capture the non-steady seepage flow behaviors in a homogeneous rectangular dam with five drainage tunnels during a linear dropdown of upstream water head. The non-steady seepage flow in the surrounding rocks of the underground powerhouse in the Shuibuya Hydropower Project is further modeled, in which a complex seepage control system is involved. Comparisons with the in situ monitoring data show that the calculation results well illustrate the non-steady seepage flow process during impounding and the operation of the reservoir as well as the seepage control effects of the drainage hole arrays and drainage tunnels.