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This study assessed the hydropower potential of a mountain watershed within the Sunkoshi River basin in Sindhupalchok, Nepal, utilizing geographic information systems (GIS) and the soil and water assessment tool (SWAT) hydrological model. Topographical, soil, land use, meteorological, and discharge data were employed to assess the study area for the appropriateness of hydropower generation. SWAT was utilized to delineate the Sunkoshi basin into 23 distinct subbasins and involved the creation of a detailed river network, incorporating various hydrological attributes including stream links, stream order, stream length, and slope gradient. After that, it was employed to simulate river discharges within these subbasins. The Sequential Uncertainty Fitting Version 2 (SUFI-2) algorithm, integrated within the SWAT Calibration and Uncertainty Program (SWAT-CUP), was employed to calibrate and validate the model. This step involved the adjustment of 25 selected parameters to enhance the model’s accuracy and reliability in representing the hydrological processes of the Sunkoshi basin. Model performance was assessed utilizing three well-established efficiency criteria: coefficient of determination (R2 = 0.79), Nash–Sutcliffe efficiency (NSE = 0.73), and percent bias (PBIAS = 17.59). The study identified 36 sites across streams of order 3, 4, and 5 as having potential for hydropower generation. The hydropower potential at each identified site was evaluated using estimated stream flow and topographical head at various probability of exceedance (PoE) levels (40%, 45%, 50%, and 60%). The aggregate hydropower potential of the basin was quantified, yielding a potential of 371.30 MW at a 40% PoE. The findings suggest that an integrated approach combining SWAT-based hydrological modeling within a GIS can accurately assess a river basin’s hydropower potential and provide insights into further evaluation of the comprehensive environmental assessment of the fragile Himalayan watersheds.