diff --git a/package.json b/package.json
index 2349f04b..63b49559 100644
--- a/package.json
+++ b/package.json
@@ -40,6 +40,12 @@
     "contributes": {
         "configuration": {
             "properties": {
+                "python-envs.injectEnvVarsInTerminals": {
+                    "type": "boolean",
+                    "default": false,
+                    "description": "%python-envs.injectEnvVarsInTerminals.description%",
+                    "scope": "window"
+                },
                 "python-envs.defaultEnvManager": {
                     "type": "string",
                     "description": "%python-envs.defaultEnvManager.description%",
diff --git a/package.nls.json b/package.nls.json
index f365cfa4..b302852a 100644
--- a/package.nls.json
+++ b/package.nls.json
@@ -1,5 +1,6 @@
 {
     "python-envs.defaultEnvManager.description": "The default environment manager for creating and managing environments.",
+    "python-envs.injectEnvVarsInTerminals.description": "Whether to inject environment variables into terminals on creating new terminals through the environments extension, defaults to false.",
     "python-envs.defaultPackageManager.description": "The default package manager for installing packages in environments.",
     "python-envs.pythonProjects.description": "The list of Python projects.",
     "python-envs.pythonProjects.path.description": "The path to a folder or file in the workspace to be treated as a Python project.",
diff --git a/src/features/terminal/terminalManager.ts b/src/features/terminal/terminalManager.ts
index bb912647..8751bf18 100644
--- a/src/features/terminal/terminalManager.ts
+++ b/src/features/terminal/terminalManager.ts
@@ -3,7 +3,7 @@ import * as path from 'path';
 import { Disposable, EventEmitter, ProgressLocation, Terminal, TerminalOptions, Uri } from 'vscode';
 import { PythonEnvironment, PythonEnvironmentApi, PythonProject, PythonTerminalCreateOptions } from '../../api';
 import { ActivationStrings } from '../../common/localize';
-import { traceInfo, traceVerbose } from '../../common/logging';
+import { traceError, traceInfo, traceVerbose } from '../../common/logging';
 import {
     createTerminal,
     onDidChangeWindowState,
@@ -258,6 +258,38 @@ export class TerminalManagerImpl implements TerminalManager {
             });
         }
 
+        const config = getConfiguration('python-envs');
+        const isEnvVarsInjectionEnabled = config.get<boolean>('injectEnvVarsInTerminals', false);
+        if (isEnvVarsInjectionEnabled) {
+            // update the environment variables with project specific ones
+            try {
+                const api = await getPythonApi();
+                const project = api.getPythonProject(environment.environmentPath);
+                if (project) {
+                    const projectEnvVars = await api.getEnvironmentVariables(project.uri);
+                    if (envVars === undefined) {
+                        // If envVars is undefined, we initialize it to an empty object.
+                        envVars = {};
+                    }
+
+                    for (const [key, value] of Object.entries(projectEnvVars)) {
+                        if (value === undefined) {
+                            // undefined as value means we want to remove the variable
+                            delete envVars[key];
+                        } else {
+                            envVars[key] = value;
+                        }
+                    }
+                } else {
+                    traceVerbose(`No project found during terminal creation for ${environment.displayName}`);
+                }
+            } catch (ex) {
+                traceError(
+                    `Failed to get environment variables for project: ${ex}, starting terminal without project environment variables.`,
+                );
+            }
+        }
+
         // Uncomment the code line below after the issue is resolved:
         // https://github.com/microsoft/vscode-python-environments/issues/172
         // const name = options.name ?? `Python: ${environment.displayName}`;