diff --git a/crates/nu-cmd-lang/src/core_commands/overlay/use_.rs b/crates/nu-cmd-lang/src/core_commands/overlay/use_.rs
index c8ad90e518..2fe77d548e 100644
--- a/crates/nu-cmd-lang/src/core_commands/overlay/use_.rs
+++ b/crates/nu-cmd-lang/src/core_commands/overlay/use_.rs
@@ -116,6 +116,8 @@ impl Command for OverlayUse {
             // b) refreshing an active overlay (the origin module changed)
 
             let module = engine_state.get_module(module_id);
+            // in such case, should also make sure that PWD is not restored in old overlays.
+            let cwd = caller_stack.get_env_var(engine_state, "PWD").cloned();
 
             // Evaluate the export-env block (if any) and keep its environment
             if let Some(block_id) = module.env_block {
@@ -160,11 +162,19 @@ impl Command for OverlayUse {
 
                 // The export-env block should see the env vars *before* activating this overlay
                 caller_stack.add_overlay(overlay_name);
+                // make sure that PWD is not restored in old overlays.
+                if let Some(cwd) = cwd {
+                    caller_stack.add_env_var("PWD".to_string(), cwd);
+                }
 
                 // Merge the block's environment to the current stack
                 redirect_env(engine_state, caller_stack, &callee_stack);
             } else {
                 caller_stack.add_overlay(overlay_name);
+                // make sure that PWD is not restored in old overlays.
+                if let Some(cwd) = cwd {
+                    caller_stack.add_env_var("PWD".to_string(), cwd);
+                }
             }
         } else {
             caller_stack.add_overlay(overlay_name);
diff --git a/tests/overlays/mod.rs b/tests/overlays/mod.rs
index 63dd6d6446..40fe45b1a7 100644
--- a/tests/overlays/mod.rs
+++ b/tests/overlays/mod.rs
@@ -720,6 +720,42 @@ fn overlay_keep_pwd() {
     assert_eq!(actual_repl.out, "samples");
 }
 
+#[test]
+fn overlay_reactivate_with_nufile_should_not_change_pwd() {
+    let inp = &[
+        "overlay use spam.nu",
+        "cd ..",
+        "overlay hide --keep-env [ PWD ] spam",
+        "cd samples",
+        "overlay use spam.nu",
+        "$env.PWD | path basename",
+    ];
+
+    let actual = nu!(cwd: "tests/overlays/samples", &inp.join("; "));
+    let actual_repl = nu!(cwd: "tests/overlays/samples", nu_repl_code(inp));
+
+    assert_eq!(actual.out, "samples");
+    assert_eq!(actual_repl.out, "samples");
+}
+
+#[test]
+fn overlay_reactivate_with_module_name_should_change_pwd() {
+    let inp = &[
+        "overlay use spam.nu",
+        "cd ..",
+        "overlay hide --keep-env [ PWD ] spam",
+        "cd samples",
+        "overlay use spam",
+        "$env.PWD | path basename",
+    ];
+
+    let actual = nu!(cwd: "tests/overlays/samples", &inp.join("; "));
+    let actual_repl = nu!(cwd: "tests/overlays/samples", nu_repl_code(inp));
+
+    assert_eq!(actual.out, "overlays");
+    assert_eq!(actual_repl.out, "overlays");
+}
+
 #[test]
 fn overlay_wrong_rename_type() {
     let inp = &["module spam {}", "overlay use spam as { echo foo }"];