diff --git a/news/3 Code Health/17747.md b/news/3 Code Health/17747.md
new file mode 100644
index 000000000000..8f5d6010f64d
--- /dev/null
+++ b/news/3 Code Health/17747.md	
@@ -0,0 +1 @@
+Improve unit tests for envVarsService, in particular the variable substitution logic (Thanks [Keshav Kini](https://github.com/kini))
diff --git a/src/test/common/variables/envVarsService.unit.test.ts b/src/test/common/variables/envVarsService.unit.test.ts
index 38a4f678c2da..03a8f2bf212f 100644
--- a/src/test/common/variables/envVarsService.unit.test.ts
+++ b/src/test/common/variables/envVarsService.unit.test.ts
@@ -406,30 +406,30 @@ SPAM=
             expect(vars).to.have.property('SPAM', '', 'value is invalid');
         });
 
-        test('Outer quotation marks are removed', () => {
+        test('Outer quotation marks are removed and cause newline substitution', () => {
             const vars = parseEnvFile(`
-SPAM=1234
-HAM='5678'
-EGGS="9012"
-FOO='"3456"'
-BAR="'7890'"
-BAZ="\"ABCD"
-VAR1="EFGH
-VAR2=IJKL"
+SPAM=12\\n34
+HAM='56\\n78'
+EGGS="90\\n12"
+FOO='"34\\n56"'
+BAR="'78\\n90'"
+BAZ="\"AB\\nCD"
+VAR1="EF\\nGH
+VAR2=IJ\\nKL"
 VAR3='MN'OP'
 VAR4="QR"ST"
             `);
 
             expect(vars).to.not.equal(undefined, 'Variables is undefiend');
             expect(Object.keys(vars!)).lengthOf(10, 'Incorrect number of variables');
-            expect(vars).to.have.property('SPAM', '1234', 'value is invalid');
-            expect(vars).to.have.property('HAM', '5678', 'value is invalid');
-            expect(vars).to.have.property('EGGS', '9012', 'value is invalid');
-            expect(vars).to.have.property('FOO', '"3456"', 'value is invalid');
-            expect(vars).to.have.property('BAR', "'7890'", 'value is invalid');
-            expect(vars).to.have.property('BAZ', '"ABCD', 'value is invalid');
-            expect(vars).to.have.property('VAR1', '"EFGH', 'value is invalid');
-            expect(vars).to.have.property('VAR2', 'IJKL"', 'value is invalid');
+            expect(vars).to.have.property('SPAM', '12\\n34', 'value is invalid');
+            expect(vars).to.have.property('HAM', '56\n78', 'value is invalid');
+            expect(vars).to.have.property('EGGS', '90\n12', 'value is invalid');
+            expect(vars).to.have.property('FOO', '"34\n56"', 'value is invalid');
+            expect(vars).to.have.property('BAR', "'78\n90'", 'value is invalid');
+            expect(vars).to.have.property('BAZ', '"AB\nCD', 'value is invalid');
+            expect(vars).to.have.property('VAR1', '"EF\\nGH', 'value is invalid');
+            expect(vars).to.have.property('VAR2', 'IJ\\nKL"', 'value is invalid');
 
             // TODO: Should the outer marks be left?
             expect(vars).to.have.property('VAR3', "MN'OP", 'value is invalid');
@@ -515,6 +515,22 @@ PYTHONPATH=${REPO}/foo:${REPO}/bar \n\
                 );
             });
 
+            test('Example from docs', () => {
+                const vars = parseEnvFile(
+                    '\
+VAR1=abc \n\
+VAR2_A="${VAR1}\\ndef" \n\
+VAR2_B="${VAR1}\\n"def \n\
+                ',
+                );
+
+                expect(vars).to.not.equal(undefined, 'Variables is undefined');
+                expect(Object.keys(vars!)).lengthOf(3, 'Incorrect number of variables');
+                expect(vars).to.have.property('VAR1', 'abc', 'value is invalid');
+                expect(vars).to.have.property('VAR2_A', 'abc\ndef', 'value is invalid');
+                expect(vars).to.have.property('VAR2_B', '"abc\\n"def', 'value is invalid');
+            });
+
             test('Curly braces are required for substitution', () => {
                 const vars = parseEnvFile('\
 SPAM=1234 \n\
@@ -592,20 +608,22 @@ PYTHONPATH=${PYTHONPATH}:${REPO}/bar \n\
                 );
             });
 
-            test('Substitution may be escaped', () => {
+            test('"$" may be escaped', () => {
                 const vars = parseEnvFile(
                     '\
 SPAM=1234 \n\
 EGGS=\\${SPAM}/foo:\\${SPAM}/bar \n\
 HAM=$ ... $$ \n\
+FOO=foo\\$bar \n\
                 ',
                 );
 
                 expect(vars).to.not.equal(undefined, 'Variables is undefiend');
-                expect(Object.keys(vars!)).lengthOf(3, 'Incorrect number of variables');
+                expect(Object.keys(vars!)).lengthOf(4, 'Incorrect number of variables');
                 expect(vars).to.have.property('SPAM', '1234', 'value is invalid');
                 expect(vars).to.have.property('EGGS', '${SPAM}/foo:${SPAM}/bar', 'value is invalid');
                 expect(vars).to.have.property('HAM', '$ ... $$', 'value is invalid');
+                expect(vars).to.have.property('FOO', 'foo$bar', 'value is invalid');
             });
 
             test('base substitution variables', () => {