Nepal, being a mountainous country with a significant rural population, faces numerous challenges in achieving sustainable development and building resilience. With a predominantly rural landscape and a history of agriculture-based livelihoods, Nepal has prioritized the development of rural areas and agriculture programs. However, the scattered and dispersed nature of rural settlements presents challenges in terms of infrastructure development due to high costs and limited funding. Moreover, the difficult terrain of mountains and hills adds to the complexity of providing essential services and infrastructure in an eco-sensitive manner. The recent restructuring of the state has resulted in 753 local units, with the majority categorized as rural municipalities. While more than 66% of the population now resides in urban municipalities, these areas still retain rural characteristics and face socio-economic challenges due to the lack of investment in infrastructure. Recognizing that today’s rural areas will become tomorrow’s municipalities, the Government of Nepal aims to promote resilient pathways to sustainable development through smart and compact rural settlement policies and implementation strategies. In this context, this book chapter examines the potential of smart villages and compact rural settlements as effective strategies for sustainable development in Nepal. Furthermore, it explores the need for supportive policy frameworks that incentivize the development of such settlements, including land-use planning policies, infrastructure guidelines, and governance mechanisms. It also emphasizes the importance of integrating smart technologies into rural development policies to enhance connectivity, access to services, and resource management. The research methodology employed in this study includes a comprehensive discussion on the review and analysis of the information obtained from secondary sources, such as literature reviews of relevant books, journals, websites, government budget speeches, census data, periodic plans of Nepal, government policies and planning documents, as well as publications on rural and urban settlement development. The policy implications of this book chapter emphasizes the need for a holistic and forward-thinking policy framework that supports the adoption of smart and compact rural settlements as a pathway to sustainable development in Nepal.