Introduction Diabetes mellitus (DM) is associated with significant morbidity and mortality due to vascular complications. Diabetic retinopathy (DR) is the most common microvascular complication of diabetes. Videocapillaroscope has been the predominant tool for nailfold capillary analysis. We aimed at using the commonly available handheld dermatoscope and observe changes in the nailfold capillaries as a part of evaluating diabetic microvascular involvement. Materials and methods A cross-sectional observational study involving 262 patients of diabetes mellitus and 150 controls was conducted for nailfold capillaroscopic changes using a hand-held dermatoscope over a period of 1 year. Results All the capillaroscopic variables like tortuosity, increased capillary density, neoangiogenesis, microhaemorrhages, avascular areas, crossing and meandering capillaries and receding capillaries were significantly more among diabetic than healthy controls. Patients with diabetic retinopathy had significant nailfold capillaroscopic features as compared to patients without DR (P value < 0.001). Neoangiogenesis, receding capillaries and avascular area were significantly higher in proliferative DR as against nonproliferative DR (P < 0.001). A positive association was found between the duration of DM and HbA1c values and NFC features. A decrease in the visualisation of NFC features was noted with increasing skin tone. The difference was significantly more between Fitzpatrick skin phototypes 4 and 5. Limitations The study was limited by its qualitative nature of accessing parameters as precise quantitative assessment of various findings cannot be done by a hand-held dermatoscope. Conclusion Nailfold capillaroscopy is a quick, cost-effective screening tool for identifying patients at high risk of DR in patients with skin of colour. NFC findings may mirror DR changes. The qualitative findings of NFC using a hand-held dermatoscope were comparable to other modes of nailfold capillaroscopy.