Water security is one of the central global issues today. This study aimed to describe and test the validity and reliability of a household water insecurity scale, and to assess the impact of household water insecurity on psychological distress among 371 women living in urban Nepal. A household interview survey was conducted using a structured questionnaire. Approximately 70% of the participants experienced collecting less water than they needed. Four domains of household water insecurity emerged from the principal components factor analysis: (i) difficulties in house-work related to water, (ii) lost opportunity costs and social interactions related to water, (iii) an insufficient safe water supply, and (iv) difficulties in basic activities related to water. Multivariate regression analysis showed that the domains of ‘lost opportunity costs and social interactions’, ‘difficulties in house-work’ and ‘difficulties in basic activities’ were associated with psychological distress among women. The impact of household water insecurity on psychological distress differed by water supply service levels. The current household water insecurity scale is a simple instrument which can be used to prioritise the target population for water interventions. Further research should be conducted towards the development of a universally applicable measurement tool.