Background <p>Health literacy is a critical component of achieving Sustainable Development Goal 3 (SDG3) and advancing Universal Health Coverage (UHC). Despite its importance, low health literacy is prevalent and linked to poor health outcomes, even among highly educated individuals particularly undergraduate students.</p> Objective <p>This study aimed to assess the level of health literacy among undergraduate students and identify factors influencing their health literacy.</p> Methodology <p>A quantitative, cross-sectional study was conducted among 196 undergraduate students of Rara Multiple Campus, Chhayanath Rara Municipality, Mugu district. Stratified random sampling with proportional allocation was used to divide students by academic year, followed by random selection within strata using a random number table. Health literacy was assessed using the 16-item short form of the European Health Literacy Survey Questionnaire (HLS-EU-Q16) which showed good reliability (Cronbach’s alpha = 0.85).</p> Results <p>Among the participants, 65.8% exhibited limited health literacy, while 34.2% had adequate health literacy. Significant associations were observed between health literacy and academic year, as well as the educational status of fathers. First-year students and those with illiterate fathers were at significantly higher odds of limited health literacy.</p> Conclusion <p>The findings reveal a high prevalence of limited health literacy among undergraduate students in Chhayanath Rara Municipality. Academic year and paternal education significantly influence health literacy levels. These results emphasize the need for targeted interventions to enhance health literacy, particularly in non-health-focused academic settings.</p>