diff --git a/src/features/terminal/terminalEnvVarInjector.ts b/src/features/terminal/terminalEnvVarInjector.ts
index aeb1f97b..0a8d685e 100644
--- a/src/features/terminal/terminalEnvVarInjector.ts
+++ b/src/features/terminal/terminalEnvVarInjector.ts
@@ -84,9 +84,9 @@ export class TerminalEnvVarInjector implements Disposable {
         // Listen for changes to the python.envFile setting
         this.disposables.push(
             workspace.onDidChangeConfiguration((e) => {
-                if (e.affectsConfiguration('python.envFile')) {
+                if (e.affectsConfiguration('python.envFile') || e.affectsConfiguration('python.terminal.useEnvFile')) {
                     traceVerbose(
-                        'TerminalEnvVarInjector: python.envFile setting changed, updating environment variables',
+                        'TerminalEnvVarInjector: python.envFile or python.terminal.useEnvFile setting changed, updating environment variables',
                     );
                     this.updateEnvironmentVariables().catch((error) => {
                         traceError('Failed to update environment variables:', error);
diff --git a/src/test/features/terminalEnvVarInjector.unit.test.ts b/src/test/features/terminalEnvVarInjector.unit.test.ts
index b2998424..0d5a1050 100644
--- a/src/test/features/terminalEnvVarInjector.unit.test.ts
+++ b/src/test/features/terminalEnvVarInjector.unit.test.ts
@@ -189,6 +189,76 @@ suite('TerminalEnvVarInjector', () => {
         });
     });
 
+    suite('Configuration change triggers updateEnvironmentVariables', () => {
+        let configChangeCallback: ((e: { affectsConfiguration(section: string): boolean }) => void) | undefined;
+
+        setup(() => {
+            // Capture the onDidChangeConfiguration listener so we can fire it manually
+            Object.defineProperty(workspace, 'onDidChangeConfiguration', {
+                value: (listener: (e: { affectsConfiguration(section: string): boolean }) => void) => {
+                    configChangeCallback = listener;
+                    return new Disposable(() => {});
+                },
+                configurable: true,
+            });
+        });
+
+        test('should call updateEnvironmentVariables when python.terminal.useEnvFile changes', async () => {
+            envVarManager
+                .setup((m) => m.getEnvironmentVariables(typeMoq.It.isAny()))
+                .returns(() => Promise.resolve({ VAR: 'value' }));
+
+            injector = new TerminalEnvVarInjector(envVarCollection.object, envVarManager.object);
+            await new Promise((resolve) => setTimeout(resolve, 50));
+
+            // getEnvironmentVariables is called once during initialization
+            envVarManager.verify(
+                (m) => m.getEnvironmentVariables(typeMoq.It.isAny()),
+                typeMoq.Times.once(),
+            );
+
+            // Fire config change for python.terminal.useEnvFile
+            assert.ok(configChangeCallback, 'onDidChangeConfiguration listener should be registered');
+            configChangeCallback!({
+                affectsConfiguration: (section: string) => section === 'python.terminal.useEnvFile',
+            });
+
+            await new Promise((resolve) => setTimeout(resolve, 50));
+
+            // Should have been called again after the config change
+            envVarManager.verify(
+                (m) => m.getEnvironmentVariables(typeMoq.It.isAny()),
+                typeMoq.Times.exactly(2),
+            );
+        });
+
+        test('should call updateEnvironmentVariables when python.envFile changes', async () => {
+            envVarManager
+                .setup((m) => m.getEnvironmentVariables(typeMoq.It.isAny()))
+                .returns(() => Promise.resolve({ VAR: 'value' }));
+
+            injector = new TerminalEnvVarInjector(envVarCollection.object, envVarManager.object);
+            await new Promise((resolve) => setTimeout(resolve, 50));
+
+            envVarManager.verify(
+                (m) => m.getEnvironmentVariables(typeMoq.It.isAny()),
+                typeMoq.Times.once(),
+            );
+
+            // Fire config change for python.envFile
+            configChangeCallback!({
+                affectsConfiguration: (section: string) => section === 'python.envFile',
+            });
+
+            await new Promise((resolve) => setTimeout(resolve, 50));
+
+            envVarManager.verify(
+                (m) => m.getEnvironmentVariables(typeMoq.It.isAny()),
+                typeMoq.Times.exactly(2),
+            );
+        });
+    });
+
     suite('python.envFile compatibility', () => {
         test('python.envFile has no effect when useEnvFile is false', async () => {
             getConfigurationStub.returns(