The temple strut depicting a tree deity will be handed over to the Patan Museum at a ceremony in Kathmandu on Tuesday, attended by Assistant Foreign Minister Tim Watts.
The ceremony comes amid renewed pressure on art galleries in Australia and the United Kingdom to return artefacts shown to have landed in Western hands in unethical circumstances.
The Nepalese sculpture was stolen from the historical city's Ratneshwar Temple in 1975 and later passed to Australian art collector Alex Biancardi.
He bequeathed it to the Art Gallery of NSW in 2000.
The gallery learned in 2001 the sculpture had been stolen but held onto the piece after discussions with Nepali heritage organisations and government representatives.
It took a visitor seeing the object on display in 2019 to reignite discussions about its rightful place, leading the gallery to canvass its possible return in 2021.
The voluntary return to Nepal was ratified by the Art Gallery of NSW Board of Trustees and, as required by law, approved by NSW Governor Margaret Beazley in 2022.
"Working closely with the Nepali government and heritage organisation colleagues, the Art Gallery is pleased to have learned of the new location in Nepal for this exquisite 13th-century sculpture," Art Gallery of NSW director Michael Brand said in a statement on Saturday.
"We are also very grateful for the support of the Australian government and the Australian embassy in Kathmandu in assisting the Art Gallery to appropriately commemorate its return.
"During the past decade, the Art Gallery of NSW has put in place the necessary processes for provenance and due diligence research for all proposed art acquisitions and follows current international best practice standards.
"Such procedures ensure our decisions are legally and ethically sound, responsible and transparent."
The gallery is preparing to return to India three sculptures dating as far back as the 3rd century BCE purchased from New York art dealer Subhash Kapoor in the 2000s.
Kapoor was jailed last year for operating an antiquities smuggling racket.
The gallery is also investigating the history of the Guardian figure, a 1.4-metre gold and bronze Ming dynasty statue.
It was given to the Art Gallery in 1905 a few years after its alleged theft from a ruined palace near Beijing.
The Guardian figure's chequered history was profiled in Australian-Canadian TV production, Stuff The British Stole.
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