To investigate the household-level economic importance of income from forests under different tenure arrangements, data were collected from 304 stratified randomly sampled households within 10 villages with community forest user groups in Tanahun District, Western Nepal. We observed that forest income contributed 5.8% to total household income, ranging from 3.8% in the top income quartile to 17.4% in the lowest quartile. Analyses of poverty indices and Gini decomposition showed that incorporating forest incomes in total household income reduces measured rural poverty and income inequality. Community forestry income constituted 49.7% of forest income, followed by 27.5% from government-managed forest, and 22.8% from private forests/trees. Community forestry income, however, contributed more than other sources of forest income to income inequality, indicating elite capture. We argue that a full realisation of community forestry's poverty reduction and income equalizing potential requires modifications of rules that govern forest extraction and pricing at community forest user group level.