diff --git a/src/client/interpreter/activation/terminalEnvVarCollectionService.ts b/src/client/interpreter/activation/terminalEnvVarCollectionService.ts
index 39bee239806b..75ef8168484b 100644
--- a/src/client/interpreter/activation/terminalEnvVarCollectionService.ts
+++ b/src/client/interpreter/activation/terminalEnvVarCollectionService.ts
@@ -127,9 +127,8 @@ export class TerminalEnvVarCollectionService implements IExtensionActivationServ
         const workspaceFolder = this.getWorkspaceFolder(resource);
         const settings = this.configurationService.getSettings(resource);
         const envVarCollection = this.getEnvironmentVariableCollection({ workspaceFolder });
-        // Clear any previously set env vars from collection
-        envVarCollection.clear();
         if (!settings.terminal.activateEnvironment) {
+            envVarCollection.clear();
             traceVerbose('Activating environments in terminal is disabled for', resource?.fsPath);
             return;
         }
@@ -150,6 +149,7 @@ export class TerminalEnvVarCollectionService implements IExtensionActivationServ
                 return;
             }
             await this.trackTerminalPrompt(shell, resource, env);
+            envVarCollection.clear();
             this.processEnvVars = undefined;
             return;
         }
@@ -164,6 +164,8 @@ export class TerminalEnvVarCollectionService implements IExtensionActivationServ
         // PS1 in some cases is a shell variable (not an env variable) so "env" might not contain it, calculate it in that case.
         env.PS1 = await this.getPS1(shell, resource, env);
 
+        // Clear any previously set env vars from collection
+        envVarCollection.clear();
         Object.keys(env).forEach((key) => {
             if (shouldSkip(key)) {
                 return;
diff --git a/src/test/interpreters/activation/terminalEnvVarCollectionService.unit.test.ts b/src/test/interpreters/activation/terminalEnvVarCollectionService.unit.test.ts
index 1513be676ee4..cedc2701112f 100644
--- a/src/test/interpreters/activation/terminalEnvVarCollectionService.unit.test.ts
+++ b/src/test/interpreters/activation/terminalEnvVarCollectionService.unit.test.ts
@@ -570,7 +570,7 @@ suite('Terminal Environment Variable Collection Service', () => {
         await terminalEnvVarCollectionService._applyCollection(undefined, customShell);
 
         verify(collection.replace('CONDA_PREFIX', 'prefix/to/conda', anything())).once();
-        verify(collection.clear()).twice();
+        verify(collection.clear()).once();
     });
 
     test('If no activated variables are returned for default shell, clear collection', async () => {