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Background: Understanding of risk factors and developing healthy lifestyles is a way of tackling the surging burden of chronic diseases in low-to-middle income countries such as Nepal. Health literacy (HL) has a pivotal role in prevention, adherence to treatment, self-care, and better use of health care; therefore, factors associated with HL need to be studied in the context of Nepal. Objective: This study was conducted to assess the level of HL and explore disease-specific knowledge among patients with chronic diseases. Methods: A cross-sectional study was conducted among 426 respondents with hypertension, diabetes mellitus, or chronic obstructive pulmonary disease from a tertiary care hospital and primary care clinics using face-to-face interviews. HL was measured using a translated and pretested HL questionnaire (the Europe-Asia Health Literacy Survey Questionnaire). Disease-related knowledge was assessed using a validated questionnaire. Key Results: The study found that 27% of the respondents had sufficient HL, 19% had marginal HL, and 54% had inadequate HL. Factors associated with inadequate HL included being older and female, and having lower or no education, unemployment or retired status, poverty, and having a history of smoking or a history of consuming alcohol. HL was a strong predictor of knowledge regarding hypertension (β = 0.32; p < .05), diabetes mellitus (β = 0.41; p < .05), and chronic obstructive pulmonary disease (β = 0.37; p < .05) in multiple regression analyses after adjusting for age, gender, education, marriage, family history of disease, attendance at follow-up clinics at recommended intervals, information received regarding disease at clinics, smoking, and alcohol intake. Conclusions: A sufficient level of HL was uncommon among participants in our study. People with sufficient HL knew significantly more about their diseases or conditions than those with inadequate HL.