The mismatch between the fast-growing urban population and limited urban infrastructure has become a challenge in many emerging cities. The lack of affordable housing leads to burgeoning informal settlements and Manohara informal settlement in Kathmandu is not an exception. This study aims to investigate the current situation in Manohara informal settlement and examine the feasibility of floor area ratio (FAR) incentives in providing affordable housing. A household survey in Manohara informal settlement and simulation analyses of FAR incentive found the following. Firstly, given the limited budget and little control over the land of Kathmandu by the government, a planning tool focusing on development gain is a suitable option for housing provision for low-income households. Secondly, the FAR incentive simulation of a land size of 50,000 sq. ft. in Kathmandu shows that 50%p incentive allowance can add 33–93% extra profit to the developers in a housing project, which can be secured for affordable housing for the public interest.