The march is timed to coincide with the Hindu festival of Gai Jatra, which brings hundreds onto the streets to pay respects to those who have died in the past year.
Historically Gai Jatra, which dates back to when Nepal was under royal rule, was also a chance for people to criticise the government -- with many people in colourful costumes satirising politicians.
In recent years the gay community has started using the festival to call attention to its demands for equal rights.
"Every year we celebrate a pride festival to show that we want to be recognised in this society with our different identity, that we are a part of this society," said Pinky Gurung, president of the Blue Diamond Society, a gay rights organisation in Nepal.
Nepal has some of South Asia's most progressive laws on homosexuality and transgender rights, but activists say members of the community continue to face discrimination and live in the shadows of society.
Last month a transgender woman and her husband were issued a marriage certificate by a district office, a first in Nepal.
But the country's laws are silent on same-sex or transgender marriages and the legality of the union is unclear.
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