Sepsis, an important and preventable cause of death in the newborn, is associated with high out of pocket hospitalization costs for the parents/guardians. The government of Nepal's Free Newborn Care (FNC) service that covers hospitalization costs has set a maximum limit of Nepalese rupees (NPR) 8000 i.e. USD 73.5, the basis of which is unclear. We aimed to estimate the costs of treatment in neonates and young infants fulfilling clinical criteria for sepsis, defined as clinical severe infection (CSI) to identify determinants of increased cost. This study assessed costs for treatment of 206 infants 3-59 days old, enrolled in a clinical trial, and admitted to the Kanti Children's Hospital in Nepal through June 2017 to December 2018. Total costs were derived as the sum of direct costs for bed charges, investigations, and medicines and indirect costs calculated by using work time loss of parents. We estimated treatment costs for CSI, the proportion exceeding NPR 8000 and performed multivariable linear regression to identify determinants of high cost. Of the 206 infants, 138 (67%) were neonates (3-28 days). The median (IQR) direct costs for treatment of CSI in neonates and young infants (29-59 days) were USD 111.7 (69.8-155.5) and 65.17 (43.4-98.5) respectively. The direct costs exceeded NPR 8000 (USD 73.5) in 69% of neonates with CSI. Age <29 days, moderate malnutrition, presence of any sign of critical illness and documented treatment failure were found to be important determinants of high costs for treatment of CSI. According to this study, the average treatment cost for a newborn with CSI in a public tertiary level hospital is substantial. The maximum limit offered for free newborn care in public hospitals needs to be revised for better acceptance and successful implementation of the FNC service to avert catastrophic health expenditures in developing countries like Nepal. Trial Registration: CTRI/2017/02/007966 (Registered on: 27/02/2017).