About 73% of Bhutan’s land area is currently under forest coverage, and the forest occupies a potentially important position in promoting rural livelihood and thereby alleviating the poverty of people living in and around the forest. This study uses data from the Bhutan Living Standard Survey to examine the relative contribution of wood and non-wood-based forest products to rural household income and poverty alleviation. It uses a propensity score matching approach to correct for potential sample selection bias that may arise due to systematic differences between households who exploit forest resources and those who do not. Our results show that rural households with forestry related activities have a higher income and are less prone to poverty than those who do not exploit forest resources. However, the increase in income due to forestry activities is in general limited, although this increase may be substantial for the poorest households, representing up to 25% of their income. Our results also confirm the global trend that wood-based forest products are more economically rewarding than non-wood forest products. We conclude with some policy implications underlining the potential of the development of forest activities for the betterment of the rural poor in Bhutan.