A joint statement issued at the end of Indian Prime Minister Narendra Modi's two-day visit to Nepal said it also had been agreed to review "other bilateral agreements".
Modi and his Nepalese counterpart Sushil Koirala welcomed the decision. The agreement said Kathmandu will provide at the earliest proposals to revise the 1950 treaty.
"Both sides agreed that the revised treaty should better reflect the current realities and aim to further consolidate and expand the multifaceted and deep-rooted relationship in a forward looking manner," the statement said.
Signed in Kathmandu in July 1950, the treaty calls for free movement of people and goods between both countries. In Nepal, however, the treaty is unpopular in sections of the society.
Critics in Nepal say the treaty was signed by unpopular leaders without consulting the people.