Introduction: Neonates are prone for sepsis due to their immature immune system. Sepsis is preventable if we aware of the maternal and neonatal risk factors. This study aimed to identify the incidence of sepsis and its risk factors. Methods: A prospective observational study was carried out among 288 neonates in level III Neonatal unit. Convenience sampling technique was used to enroll the neonates who met the inclusion criteria. Data pertaining to neonatal and maternal demographic and clinical characteristics, incidence of sepsis, risk factors of sepsis were collected by direct observation and from medical record. Data regarding number of skin pricks for blood sample and intravenous cannulation and number of handling of the baby were collected from Tally counters. Data were analysed using chi square test, t-test and logistic regression with SPSS software version 25. Results: The incidence of sepsis was 34.7% in level III neonatal unit. Culture positive sepsis constituted 7.3%, urinary tract infection 0.3%, meningitis 7 % and probable sepsis 26.4%. Neonatal factors like extreme preterm, extreme low birth weight, gestational age, birth weight, duration of stay in level III neonatal unit, number of handling, number of skin pricks, duration of intravenous line, duration of tube feeds, mechanical ventilation and maternal premature rupture of membrane were associated with neonatal sepsis significantly. Conclusion: Incidence of neonatal sepsis can be minimized by concentrating on modifiable risk factors and implementing the protocol of minimum handling and minimal skin pricks for the neonates.