Forests are crucial for Nepal to achieve its carbon neutrality goals; however, a disconnect often exists between national policies and the local, Indigenous knowledge systems that ensure sustainable forest management. While community-based forest management (CBFM) is recognized as a successful model, a comprehensive analysis of how the integration of community engagement and Indigenous knowledge contributes explicitly to carbon sequestration remains underexplored. This study aims to fill this gap by examining the synergistic role of these elements in enhancing forest conservation and advancing carbon neutrality in Nepal. Using the standard PRISMA framework, a systematic literature search was conducted across five academic databases: Web of Science, Scopus, Google Scholar, ResearchGate, and Sci-Hub, to ensure comprehensive coverage of relevant studies. Following a series of rigorous screening steps, 74 studies were identified as the final sample for in-depth analysis. Our findings demonstrate that community-managed forests significantly increase carbon stocks, with sequestration rates of 1–3 tC ha-1 annually, alongside notable improvements in forest cover and biodiversity. The study identifies that the success of CBFM is rooted in traditional practices, such as rotational grazing and farm-forest integration. However, challenges such as the exclusion of marginalized groups from decision-making processes can undermine equity and effectiveness. We conclude that supportive policies which formally recognize community rights, integrate Indigenous knowledge into conservation planning, and promote equitable benefit-sharing are essential. Prioritizing this integrated approach not only accelerates progress toward carbon neutrality but also fosters social equity and climate resilience, offering a replicable model for other forest-dependent nations.