diff --git a/package.json b/package.json
index 0a393ed4a..7a96803b9 100644
--- a/package.json
+++ b/package.json
@@ -122,7 +122,7 @@
                         "%python-envs.terminal.autoActivationType.shellStartup%",
                         "%python-envs.terminal.autoActivationType.off%"
                     ],
-                    "scope": "machine"
+                    "scope": "window"
                 },
                 "python.terminal.useEnvFile": {
                     "type": "boolean",
diff --git a/src/features/terminal/utils.ts b/src/features/terminal/utils.ts
index bcac67e38..0fe72c016 100644
--- a/src/features/terminal/utils.ts
+++ b/src/features/terminal/utils.ts
@@ -389,10 +389,12 @@ export type AutoActivationType = 'off' | 'command' | 'shellStartup';
  *
  * Priority order:
  * 1. python-envs.terminal.autoActivationType
- *    a. globalRemoteValue
- *    b. globalLocalValue
- *    c. globalValue
- * 2. python.terminal.activateEnvironment setting (if false, returns 'off')
+ *    a. workspaceFolderValue
+ *    b. workspaceValue
+ *    c. globalRemoteValue
+ *    d. globalLocalValue
+ *    e. globalValue
+ * 2. python.terminal.activateEnvironment setting (if false, returns 'off' & sets autoActivationType to 'off')
  * 3. Default to 'command' if no setting is found
  *
  * @returns {AutoActivationType} The determined auto-activation type
@@ -402,9 +404,15 @@ export function getAutoActivationType(): AutoActivationType {
     const pyEnvsActivationType = pyEnvsConfig.inspect<AutoActivationType>('terminal.autoActivationType');
 
     if (pyEnvsActivationType) {
-        // Priority order: globalRemoteValue > globalLocalValue > globalValue
+        // Priority order: workspaceFolderValue > workspaceValue > globalRemoteValue > globalLocalValue > globalValue
         const activationType = pyEnvsActivationType as Record<string, unknown>;
 
+        if (pyEnvsActivationType.workspaceFolderValue !== undefined) {
+            return pyEnvsActivationType.workspaceFolderValue;
+        }
+        if (pyEnvsActivationType.workspaceValue !== undefined) {
+            return pyEnvsActivationType.workspaceValue;
+        }
         if ('globalRemoteValue' in pyEnvsActivationType && activationType.globalRemoteValue !== undefined) {
             return activationType.globalRemoteValue as AutoActivationType;
         }
diff --git a/src/test/features/terminal/utils.unit.test.ts b/src/test/features/terminal/utils.unit.test.ts
index 8ce504492..ad9cd35f5 100644
--- a/src/test/features/terminal/utils.unit.test.ts
+++ b/src/test/features/terminal/utils.unit.test.ts
@@ -339,7 +339,46 @@ suite('Terminal Utils - getAutoActivationType', () => {
     });
 
     suite('Priority Order Tests', () => {
-        test('should return globalRemoteValue when set (highest priority)', () => {
+        test('should return workspaceFolderValue when set (highest priority)', () => {
+            const mockInspectResult = {
+                workspaceFolderValue: ACT_TYPE_OFF,
+                workspaceValue: ACT_TYPE_SHELL,
+                globalRemoteValue: ACT_TYPE_COMMAND,
+            };
+            pyEnvsConfig.inspect.withArgs('terminal.autoActivationType').returns(mockInspectResult);
+
+            const result = getAutoActivationType();
+
+            assert.strictEqual(result, ACT_TYPE_OFF, 'Should return workspaceFolderValue when set');
+        });
+
+        test('should return workspaceValue when workspaceFolderValue is undefined', () => {
+            const mockInspectResult = {
+                workspaceFolderValue: undefined,
+                workspaceValue: ACT_TYPE_SHELL,
+                globalRemoteValue: ACT_TYPE_COMMAND,
+            };
+            pyEnvsConfig.inspect.withArgs('terminal.autoActivationType').returns(mockInspectResult);
+
+            const result = getAutoActivationType();
+
+            assert.strictEqual(result, ACT_TYPE_SHELL, 'Should return workspaceValue when workspaceFolderValue is undefined');
+        });
+
+        test('should ignore globalRemoteValue when workspaceValue exists', () => {
+            const mockInspectResult = {
+                workspaceValue: ACT_TYPE_OFF,
+                globalRemoteValue: ACT_TYPE_SHELL,
+                globalLocalValue: ACT_TYPE_COMMAND,
+            };
+            pyEnvsConfig.inspect.withArgs('terminal.autoActivationType').returns(mockInspectResult);
+
+            const result = getAutoActivationType();
+
+            assert.strictEqual(result, ACT_TYPE_OFF, 'Should prioritize workspaceValue over globalRemoteValue');
+        });
+
+        test('should return globalRemoteValue when set and no workspace values exist', () => {
             // Mock - globalRemoteValue is set
             const mockInspectResult = {
                 globalRemoteValue: ACT_TYPE_SHELL,