This review paper is designed to demonstrate how community forestry has played an important role in the livelihood improvement of poor people in the rural areas of Nepal. The Community Forestry Program in Nepal has been a successful model for participatory action oriented especially in environmental governance and community-based forest management in developing countries which encompasses well-defined policies, institutions and practices. The program addresses the twin goals of forest conservation on one hand and livelihood improvement on the other hand. It is well known that there is a great diversity among resource users in terms of access, use and control over community forestry but still it is playing a large role in improving livelihood, increasing forest resources and also mitigating climate change. Promoting community forest management in Nepal can be an effective policy instrument for poverty eradication and improvement of overall living standards like in many developing countries. There is always a problem of capture of the benefits by the elites in each community, so increase in the level of awareness is always necessary to ensure the involvement of disenfranchised people where their needs are met, so giving access and management rights over forest resources to local communities is expected to enhance livelihoods and other benefits of these impoverished people. Policy-makers, experts and the local communities should be involved in developing and improving the benefits obtained from community forestry for the benefits of local people. Some challenges still remain, including elite capture, social disparity, inequitable benefit-sharing and exclusion of poor and marginalized users faced by the community forestry, local users, government officials and other stakeholders which should be solved soon to show the profound impact of community forestry management, utilization and conservation on a sustainable basis.