Water sources classified as “improved” may not necessarily provide safe drinking water for householders. We analyzed data from Nepal Multiple Indicator Cluster Survey 2014 to explore the extent of fecal contamination of household drinking water. Fecal contamination was detected in 81.2% (95% confidence interval [CI]: 77.9–84.2) household drinking water from improved sources and 89.6% (95% CI: 80.4–94.7) in water samples from unimproved sources. In adjusted analysis, there was no difference in odds of fecal contamination of household drinking water between improved and unimproved sources. We observed significantly lower odds of fecal contamination of drinking water in households in higher wealth quintiles, where soap and water were available for handwashing and in households employing water treatment. The extent of contamination of drinking water as observed in this study highlights the huge amount of effort required to ensure the provision of safely managed water in Nepal by 2030 as aimed in sustainable development goals.