Since the 1970s, the implementation of community forestry (CF) programs in Nepal has recognized that local involvement is a prerequisite for sustainably managing forests and fulfilling local resource needs. Although this devolution policy of active local participation has halted and in many cases reversed forest degradation, a comprehensive research on attributes of CF and its impact on local community livelihoods, especially among the rural populations in the low-lying Terai region- is lacking. Hence, using an institutional analysis approach, this research attempts to understand changes in forest management and governance. More specifically, this paper explores major attributes of CF, i.e. the forest, dependency of local people on the forest, institutions that govern local people interaction with the forest and other actors as well as economic and tree cover outcomes. The overall results indicated that most respondents were highly dependent on local forests for economic, ecological and cultural purposes and were collectively involved in creating rules and regulations that defined access to and distribution of CF benefits. The results also indicated that locals’ main priorities were to improve their income generation capabilities, whereas CF management primarily emphasized forest protection and local development, as CF-generated funds were used to improve local infrastructure. Hence, the main constraints to CF sustainability were identified to be the CF committee’s lack of transparency in fund expenditure and the exclusion of poor and disadvantaged households in the decision-making process. The study concludes that CF implementation is feasible in the Terai region and that equal decision-making participation is critical toward future CF sustainability.