Encephalitis is a significant global health problem, especially in children. Knowledge of its economic burden is essential for policymakers in prioritizing the development and implementation of interventions but remains limited. An observational study was prospectively conducted at a major children’s hospital in Ho Chi Minh City, Vietnam, from 2020 to 2022. Data on direct medical costs, direct non-medical costs and productivity costs were collected alongside demographic information, clinical features, diagnosis, severity, and outcomes of study participants. This was used to undertake a cost of illness analysis from a societal perspective. Data were collected from a total of 164 pediatric patients. The median cost of illness was estimated at US$1,859 (interquartile range (IQR), US$1,273–US$3,128). The direct costs were the main cost driver, accounting for 83.9% of the total cost of illness (US$1,560 (IQR: US$975–US$2,460)). The productivity costs accounted for a median of US$275 (IQR, US$154–US$474). The cost of illness was higher in more severe patients, patients with sequelae, patients with morbidities, and ventilated patients. Most of direct medical costs attributed to hospitalization and resulted in out-of-pocket payments from the patient’s family (30.2%, US$316). The results showed that the cost of illness of encephalitis in children is considerable and will be useful for policymakers in prioritizing resources for the development and implementation of intervention strategies to reduce the burden of pediatric encephalitis.