Hepatitis B Virus (HBV) infection in infancy or early childhood leads to high rate of persistent infection (25–90%). The immunological basis of high rate of viral persistence in vertically acquired HBV infections is not completely understood. CD8 T cells play a pivotal role in clearing the Hepatitis B virus infection in adults. Herein, we sought to delineate the role of T cells in viral persistence in HBsAg+ve newborns. At birth peripheral and cord blood of HBsAg+ve (N = 12), HBsAg-ve (N = 10) and healthy newborns (HC: N = 15) were evaluated for T-cell frequency and functionality by flow cytometry. No significant differences were observed in the frequency of CD8 and CD4 T cells in all the three groups. However, significantly higher frequency of FoxP3 expressing regulatory T cells were observed in HBsAg+ve (63.79%) compared with HBsAg-ve (28.12%) and HC (11.06%) (P < 0.05). Moreover, HBsAg+ve newborns showed functional defect in CD8 T cells by decreased IFN-γ production and lower CD107A expression (cytotoxic capacity) compared with HBsAg-ve and HC, which positively correlated with decreased TCRζ-chain expression CD8 T cells (r2 > 0.93, P < 0.05). Despite equal frequency of CD8 T cells in all the three groups, CD8 T cells in HBsAg+ve newborns are dysfunctional. An expansion of regulatory T cells and impaired TCR signalling may represent the immune tolerant state of the adaptive immune system in response to chronic HBV infection.