This was decided during the recent visit of Nepalese Deputy Prime Minister and Foreign Minister Krishna Bahadur Mahara to Beijing.
"Both sides have agreed to move forward technical works relating to construction of Nepal-China cross-border railway line," the Foreign Ministry said in a statement last week.
During the high-level talks in Beijing, Mr Mahara had requested China to forward the work relating to preparation of a Detailed Project Report for the construction of inter-country railway line giving it high priority, it said.
However, China's state-run People's Daily has claimed that during Mr Mahara's visit to China early this month a deal has been struck to establish the rail link.
It said the rail link includes two lines: one connecting three of Nepal's most important cities and two between China and Nepal.
"Although the railway connection between China and Nepal is intended to boost regional development and not for military purposes, the move will still probably irritate India," he was quoted as saying by the daily - the ruling communist party's official mouthpiece.
China last year agreed to consider building a railway into Nepal and to start a feasibility study for a free trade agreement with landlocked Nepal, which has been trying to lessen its dependence on its other big neighbour India.
Nepal also signed up to President Xi Jinping's Belt and Road initiative which is opposed by India as it passes through Pakistan-occupied Kashmir.
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