There is limited research on mental health literacy among undergraduate nursing students in Australia. Overseas studies indicate significant gaps in students’ knowledge and practice. The aims of this study were to (1) assess mental health literacy knowledge in undergraduate nursing students and compare these across year levels, and to (2) identify students’ learning needs about mental health literacy in practice. A convenience sample of 114 Bachelor of Nursing students studying at one Australian University completed the online survey. Results showed that third‐year students reported higher levels of mental health literacy compared to first‐ and second‐year students. Almost 40% of students felt they did not have sufficient understanding of mental health literacy for practice. Most respondents (66.7%) wanted more information on different types of mental illnesses, treatments, how to reduce mental health stigma, and how to care for and communicate with people with mental illness. Students identified that mental health first aid training should be compulsory for all nursing students. Mental health literacy is a crucial area to be addressed in undergraduate nursing education. Explicit content and skill development are required to improve students’ awareness of health literacy and inform their practice.