Health literacy is one of the most critical aspects of health promotion. Limited health literacy is also accounted for adverse health outcomes and a huge financial burden on society. However, a gap exists in the level of health literacy, especially among undergraduates. This study aimed to assess the levels of health literacy and its socio-demographic determinants among undergraduate students of Tribhuvan University, Nepal. A web-based cross-sectional survey was conducted among 469 undergraduate students from five institutes of Tribhuvan University, Nepal. The 16-item short version of the European Health Literacy Survey Questionnaire (HLS-EU-Q16) was used to measure students’ health literacy levels. Associated factors were examined using Chi-square tests followed by multivariate logistic regression analyses at the level of significance of 0.05. Nearly 61% of students were found to have limited health literacy (24.5% had “inadequate” and 36.3% had “problematic” health literacy). Female students (aOR = 1.6, 95% CI: 1.1–2.5), students from non-health related majors (aOR = 1.9, 95% CI: 1.2–3.0), students with unsatisfactory health status (aOR = 2.8, 95% CI: 1.7–4.5), students with poor financial status (aOR = 2.9, 95% CI: 1.2–6.8) and students with low self-esteem (aOR = 2.5, 95% CI: 1.5–4.1) were significantly more likely to have limited health literacy. The majority of the undergraduates were found to have limited health literacy. Gender, sector of study, self-rated health status, self-rated financial status, and self-esteem were significantly associated with limited health literacy. This study indicates university students should not be assumed to be health-literate and interventions to improve students’ health literacy especially for those whose majors are not health-related should be implemented. Further studies using a longer version of the health literacy survey questionnaire and qualitative methods to explore more on determinants of health literacy are recommended.