Introduction Diabetes mellitus (DM) is a chronic, progressive metabolic illness which is commonly complicated by coexistence of depression and anxiety. This study aimed to assess the prevalence of anxiety and depression among diabetic patients and the factors predicting this coexistence. Methods It was a cross-sectional, observational study which included patients of type 2 DM admitted in the hospital due to diabetes-related condition - diabetic foot infections/ulcers, hyperosmotic hyperglycaemic state (HHS), and hypoglycaemic coma/seizure. Anxiety and depression were measured by using the Hospital Anxiety and Depression Scale (HADS). Data was entered and analysed using SPSS version 22.0 (IBM Corp., Armonk, NY, USA). Results Mean anxiety score of the participants was 10.88 ± 4.075 and mean depression score was 11.82 ± 4.049. There were 72 (50.7%) patients who had anxiety and 70 (49.2%) patients who had depression. Higher scores of anxiety and depression were statistically significant in female gender, older participants, individuals with longer duration of diabetes, those taking non-insulin treatment, and individuals with painful neuropathy, nephropathy, and foot ulcers. Conclusion The incidence of depression and anxiety among hospitalized patients of diabetes mellitus is high. The coexistence of these two chronic debilitating illnesses is worsening the overall quality of life. It is very important to diagnose and manage anxiety and depression in patients with type 2 DM to ensure higher quality of life and life expectancy.