diff --git a/src/client/testing/common/debugLauncher.ts b/src/client/testing/common/debugLauncher.ts
index dcf23c0478db..63e2a4543beb 100644
--- a/src/client/testing/common/debugLauncher.ts
+++ b/src/client/testing/common/debugLauncher.ts
@@ -17,6 +17,7 @@ import { getWorkspaceFolder, getWorkspaceFolders } from '../../common/vscodeApis
 import { showErrorMessage } from '../../common/vscodeApis/windowApis';
 import { createDeferred } from '../../common/utils/async';
 import { pythonTestAdapterRewriteEnabled } from '../testController/common/utils';
+import { addPathToPythonpath } from './helpers';
 
 @injectable()
 export class DebugLauncher implements ITestDebugLauncher {
@@ -223,8 +224,19 @@ export class DebugLauncher implements ITestDebugLauncher {
                     `Missing value for debug setup, both port and uuid need to be defined. port: "${options.pytestPort}" uuid: "${options.pytestUUID}"`,
                 );
             }
-            const pluginPath = path.join(EXTENSION_ROOT_DIR, 'pythonFiles');
-            launchArgs.env.PYTHONPATH = pluginPath;
+        }
+        const pluginPath = path.join(EXTENSION_ROOT_DIR, 'pythonFiles');
+        // check if PYTHONPATH is already set in the environment variables
+        if (launchArgs.env) {
+            const additionalPythonPath = [pluginPath];
+            if (launchArgs.cwd) {
+                additionalPythonPath.push(launchArgs.cwd);
+            } else if (options.cwd) {
+                additionalPythonPath.push(options.cwd);
+            }
+            // add the plugin path or cwd to PYTHONPATH if it is not already there using the following function
+            // this function will handle if PYTHONPATH is undefined
+            addPathToPythonpath(additionalPythonPath, launchArgs.env.PYTHONPATH);
         }
 
         // Clear out purpose so we can detect if the configuration was used to
diff --git a/src/client/testing/common/helpers.ts b/src/client/testing/common/helpers.ts
new file mode 100644
index 000000000000..021849277b33
--- /dev/null
+++ b/src/client/testing/common/helpers.ts
@@ -0,0 +1,37 @@
+import * as path from 'path';
+
+/**
+ * This function normalizes the provided paths and the existing paths in PYTHONPATH,
+ * adds the provided paths to PYTHONPATH if they're not already present,
+ * and then returns the updated PYTHONPATH.
+ *
+ * @param newPaths - An array of paths to be added to PYTHONPATH
+ * @param launchPythonPath - The initial PYTHONPATH
+ * @returns The updated PYTHONPATH
+ */
+export function addPathToPythonpath(newPaths: string[], launchPythonPath: string | undefined): string {
+    // Split PYTHONPATH into array of paths if it exists
+    let paths: string[];
+    if (!launchPythonPath) {
+        paths = [];
+    } else {
+        paths = launchPythonPath.split(path.delimiter);
+    }
+
+    // Normalize each path in the existing PYTHONPATH
+    paths = paths.map((p) => path.normalize(p));
+
+    // Normalize each new path and add it to PYTHONPATH if it's not already present
+    newPaths.forEach((newPath) => {
+        const normalizedNewPath: string = path.normalize(newPath);
+
+        if (!paths.includes(normalizedNewPath)) {
+            paths.push(normalizedNewPath);
+        }
+    });
+
+    // Join the paths with ':' to create the updated PYTHONPATH
+    const updatedPythonPath: string = paths.join(path.delimiter);
+
+    return updatedPythonPath;
+}
diff --git a/src/test/testing/common/debugLauncher.unit.test.ts b/src/test/testing/common/debugLauncher.unit.test.ts
index 4712c9b6136a..bbb65f0b2e2a 100644
--- a/src/test/testing/common/debugLauncher.unit.test.ts
+++ b/src/test/testing/common/debugLauncher.unit.test.ts
@@ -215,6 +215,9 @@ suite('Unit Tests - Debug Launcher', () => {
         if (!expected.cwd) {
             expected.cwd = workspaceFolders[0].uri.fsPath;
         }
+        const pluginPath = path.join(EXTENSION_ROOT_DIR, 'pythonFiles');
+        const pythonPath = `${pluginPath}${path.delimiter}${expected.cwd}`;
+        expected.env.PYTHONPATH = pythonPath;
 
         // added by LaunchConfigurationResolver:
         if (!expected.python) {
@@ -342,6 +345,10 @@ suite('Unit Tests - Debug Launcher', () => {
         };
         const expected = getDefaultDebugConfig();
         expected.cwd = 'path/to/settings/cwd';
+        const pluginPath = path.join(EXTENSION_ROOT_DIR, 'pythonFiles');
+        const pythonPath = `${pluginPath}${path.delimiter}${expected.cwd}`;
+        expected.env.PYTHONPATH = pythonPath;
+
         setupSuccess(options, 'unittest', expected);
         await debugLauncher.launchDebugger(options);
 
@@ -366,6 +373,7 @@ suite('Unit Tests - Debug Launcher', () => {
             console: 'integratedTerminal',
             cwd: 'some/dir',
             env: {
+                PYTHONPATH: 'one/two/three',
                 SPAM: 'EGGS',
             },
             envFile: 'some/dir/.env',
diff --git a/src/test/testing/common/helpers.unit.test.ts b/src/test/testing/common/helpers.unit.test.ts
new file mode 100644
index 000000000000..441b257d4d0e
--- /dev/null
+++ b/src/test/testing/common/helpers.unit.test.ts
@@ -0,0 +1,48 @@
+import * as path from 'path';
+import * as assert from 'assert';
+import { addPathToPythonpath } from '../../../client/testing/common/helpers';
+
+suite('Unit Tests - Test Helpers', () => {
+    const newPaths = [path.join('path', 'to', 'new')];
+    test('addPathToPythonpath handles undefined path', async () => {
+        const launchPythonPath = undefined;
+        const actualPath = addPathToPythonpath(newPaths, launchPythonPath);
+        assert.equal(actualPath, path.join('path', 'to', 'new'));
+    });
+    test('addPathToPythonpath adds path if it does not exist in the python path', async () => {
+        const launchPythonPath = path.join('random', 'existing', 'pythonpath');
+        const actualPath = addPathToPythonpath(newPaths, launchPythonPath);
+        const expectedPath =
+            path.join('random', 'existing', 'pythonpath') + path.delimiter + path.join('path', 'to', 'new');
+        assert.equal(actualPath, expectedPath);
+    });
+    test('addPathToPythonpath does not add to python path if the given python path already contains the path', async () => {
+        const launchPythonPath = path.join('path', 'to', 'new');
+        const actualPath = addPathToPythonpath(newPaths, launchPythonPath);
+        const expectedPath = path.join('path', 'to', 'new');
+        assert.equal(actualPath, expectedPath);
+    });
+    test('addPathToPythonpath correctly normalizes both existing and new paths', async () => {
+        const newerPaths = [path.join('path', 'to', '/', 'new')];
+        const launchPythonPath = path.join('path', 'to', '..', 'old');
+        const actualPath = addPathToPythonpath(newerPaths, launchPythonPath);
+        const expectedPath = path.join('path', 'old') + path.delimiter + path.join('path', 'to', 'new');
+        assert.equal(actualPath, expectedPath);
+    });
+    test('addPathToPythonpath splits pythonpath then rejoins it', async () => {
+        const launchPythonPath =
+            path.join('path', 'to', 'new') +
+            path.delimiter +
+            path.join('path', 'to', 'old') +
+            path.delimiter +
+            path.join('path', 'to', 'random');
+        const actualPath = addPathToPythonpath(newPaths, launchPythonPath);
+        const expectedPath =
+            path.join('path', 'to', 'new') +
+            path.delimiter +
+            path.join('path', 'to', 'old') +
+            path.delimiter +
+            path.join('path', 'to', 'random');
+        assert.equal(actualPath, expectedPath);
+    });
+});