Background: Although there is a high burden of HIV in sub-Saharan Africa (SSA), studies on mental health issues among people living with HIV are scarce. The study addressed the transition to “test and treat” guidelines for HIV, which makes it unique regarding its evaluation of psychological distress amongst newly initiated people living with HIV in the test and treat era. Methods: We conducted a cross-sectional survey of 689 people newly diagnosed with HIV. Symptoms of psychological distress were measured using the Kessler-10 psychological distress assessment scale. Factors associated with psychological distress were captured using interviewer-administered questionnaires. Ordinal logistic regression analyses were employed to identify predictors of psychological distress. Results: The magnitude of psychological distress was 58.63% (95% CI = 55.2%-62.3%). The severity of the psychological distress of which, 17.42% had severe distress. Psychological distress was observed more among female patients (β = 0.47, AOR = 1.59, 95% CI = 1.12, 2.27), patients presented with opportunistic infections (β = 0.50, AOR = 1.65, 95% CI = 1.03, 2.66) and being non-working functional status (β = 0.99, AOR = 2.70, 95% CI = 1.64, 4.45). Moreover, patients who were malnourished (β = 0.46, AOR = 1.58, 95% CI = 1.09, 2.26), having good level of knowledge on HIV prevention (β = 0.59, 95% CI = 0.55, 0.39, 0.78), presented with sexually transmitted infection (β = 0.48, AOR = 1.61, 95% CI = 1.01, 2.58), history of alcohol use (β = 0.44, AOR = 1.55, 95% CI = 1.09, 2.21), perceived stigma (β = 0.08, AOR = 1.09 95% CI = 1.04, 1.15) and treated in health centers (β = 0.55, AOR = 1.74, 95% CI = 1.25, 2.41) had higher odds of psychological distress. Conclusion: The large majority of newly diagnosed HIV patients suffered from psychological distress. An increased vulnerability was observed among females, those with opportunistic and sexually transmitted infections, those having poor functional status and malnourished. Furthermore, HIV patients treated in health centers, those who had history of alcohol use and patients with high level of HIV related stigma are more negatively affected by the HIV diagnosis. Hence, all intervention strategies should target all the identified predictors.