Enhancing the capacity to adapt to climate change impacts has become a critical challenge for the developing countries. This article therefore analyzes the legal and policy aspects and institutional structure of water resource management in Nepal. Policy and institutional analysis approach is used in the research as it offers a more comprehensive framework for thinking water governance issues. Data was generated from literature review, consultation with policy makers, and interaction with communities in Nepal. The findings show that inadequate legal and policy focus on emerging issues like climate change has resulted in ineffective response to both development and climate change issues at the local level. The study shows that the current institutional structure, mandate and performances have limitations such as lack of capacity, poor institutional governance and issues around understanding as well as responding to climate change. Due to implementation gaps of policies, poor and marginalized households are more exposed to climate risk and vulnerability. It was also found that poor and marginalized household and communities were deprived from access to water resources due to constraining provisions within policies and practices. The knowledge generated from this research outlined the suggestions on how to effectively respond to climate change in water resources sector and address the risk and vulnerability of communities dependent on water resources.