diff --git a/doc/manual/rl-next/shebang-relative.md b/doc/manual/rl-next/shebang-relative.md
new file mode 100644
index 000000000..c887a598a
--- /dev/null
+++ b/doc/manual/rl-next/shebang-relative.md
@@ -0,0 +1,62 @@
+---
+synopsis: "`nix-shell` shebang uses relative path"
+prs:
+- 5088
+- 11058
+issues:
+- 4232
+---
+
+<!-- unfortunately no link target for the specific syntax -->
+Relative [path](@docroot@/language/values.md#type-path) literals in `nix-shell` shebang scripts' options are now resolved relative to the [script's location](@docroot@/glossary?highlight=base%20directory#gloss-base-directory).
+Previously they were resolved relative to the current working directory.
+
+For example, consider the following script in `~/myproject/say-hi`:
+
+```shell
+#!/usr/bin/env nix-shell
+#!nix-shell --expr 'import ./shell.nix'
+#!nix-shell --arg toolset './greeting-tools.nix'
+#!nix-shell -i bash
+hello
+```
+
+Older versions of `nix-shell` would resolve `shell.nix` relative to the current working directory; home in this example:
+
+```console
+[hostname:~]$ ./myproject/say-hi
+error:
+       … while calling the 'import' builtin
+         at «string»:1:2:
+            1| (import ./shell.nix)
+             |  ^
+
+       error: path '/home/user/shell.nix' does not exist
+```
+
+Since this release, `nix-shell` resolves `shell.nix` relative to the script's location, and `~/myproject/shell.nix` is used.
+
+```console
+$ ./myproject/say-hi
+Hello, world!
+```
+
+**Opt-out**
+
+This is technically a breaking change, so we have added an option so you can adapt independently of your Nix update.
+The old behavior can be opted into by setting the option [`nix-shell-shebang-arguments-relative-to-script`](@docroot@/command-ref/conf-file.md#conf-nix-shell-shebang-arguments-relative-to-script) to `false`.
+This option will be removed in a future release.
+
+**`nix` command shebang**
+
+The experimental [`nix` command shebang](@docroot@/command-ref/new-cli/nix.md?highlight=shebang#shebang-interpreter) already behaves in this script-relative manner.
+
+Example:
+
+```shell
+#!/usr/bin/env nix
+#!nix develop
+#!nix --expr ``import ./shell.nix``
+#!nix -c bash
+hello
+```
diff --git a/src/libcmd/common-eval-args.cc b/src/libcmd/common-eval-args.cc
index 470a25c4e..decadd751 100644
--- a/src/libcmd/common-eval-args.cc
+++ b/src/libcmd/common-eval-args.cc
@@ -214,7 +214,7 @@ Bindings * MixEvalArgs::getAutoArgs(EvalState & state)
         auto v = state.allocValue();
         std::visit(overloaded {
             [&](const AutoArgExpr & arg) {
-                state.mkThunk_(*v, state.parseExprFromString(arg.expr, state.rootPath(".")));
+                state.mkThunk_(*v, state.parseExprFromString(arg.expr, compatibilitySettings.nixShellShebangArgumentsRelativeToScript ? state.rootPath(absPath(getCommandBaseDir())) : state.rootPath(".")));
             },
             [&](const AutoArgString & arg) {
                 v->mkString(arg.s);
diff --git a/src/libcmd/compatibility-settings.hh b/src/libcmd/compatibility-settings.hh
index 5dc0eaf2b..a129a957a 100644
--- a/src/libcmd/compatibility-settings.hh
+++ b/src/libcmd/compatibility-settings.hh
@@ -7,12 +7,29 @@ struct CompatibilitySettings : public Config
 
     CompatibilitySettings() = default;
 
+    // Added in Nix 2.24, July 2024.
     Setting<bool> nixShellAlwaysLooksForShellNix{this, true, "nix-shell-always-looks-for-shell-nix", R"(
         Before Nix 2.24, [`nix-shell`](@docroot@/command-ref/nix-shell.md) would only look at `shell.nix` if it was in the working directory - when no file was specified.
 
         Since Nix 2.24, `nix-shell` always looks for a `shell.nix`, whether that's in the working directory, or in a directory that was passed as an argument.
 
-        You may set this to `false` to revert to the Nix 2.3 behavior.
+        You may set this to `false` to temporarily revert to the behavior of Nix 2.23 and older.
+
+        Using this setting is not recommended.
+        It will be deprecated and removed.
+    )"};
+
+    // Added in Nix 2.24, July 2024.
+    Setting<bool> nixShellShebangArgumentsRelativeToScript{
+        this, true, "nix-shell-shebang-arguments-relative-to-script", R"(
+        Before Nix 2.24, relative file path expressions in arguments in a `nix-shell` shebang were resolved relative to the working directory.
+
+        Since Nix 2.24, `nix-shell` resolves these paths in a manner that is relative to the [base directory](@docroot@/glossary.md#gloss-base-directory), defined as the script's directory.
+
+        You may set this to `false` to temporarily revert to the behavior of Nix 2.23 and older.
+
+        Using this setting is not recommended.
+        It will be deprecated and removed.
     )"};
 };
 
diff --git a/src/libutil/args/root.hh b/src/libutil/args/root.hh
index 5c55c37a5..34a43b538 100644
--- a/src/libutil/args/root.hh
+++ b/src/libutil/args/root.hh
@@ -29,6 +29,7 @@ struct Completions final : AddCompletions
  */
 class RootArgs : virtual public Args
 {
+protected:
     /**
      * @brief The command's "working directory", but only set when top level.
      *
diff --git a/src/nix-build/nix-build.cc b/src/nix-build/nix-build.cc
index 4d373ef8d..0ce987d8a 100644
--- a/src/nix-build/nix-build.cc
+++ b/src/nix-build/nix-build.cc
@@ -183,6 +183,9 @@ static void main_nix_build(int argc, char * * argv)
     struct MyArgs : LegacyArgs, MixEvalArgs
     {
         using LegacyArgs::LegacyArgs;
+        void setBaseDir(Path baseDir) {
+            commandBaseDir = baseDir;
+        }
     };
 
     MyArgs myArgs(myName, [&](Strings::iterator & arg, const Strings::iterator & end) {
@@ -290,6 +293,9 @@ static void main_nix_build(int argc, char * * argv)
     state->repair = myArgs.repair;
     if (myArgs.repair) buildMode = bmRepair;
 
+    if (inShebang && compatibilitySettings.nixShellShebangArgumentsRelativeToScript) {
+        myArgs.setBaseDir(absPath(dirOf(script)));
+    }
     auto autoArgs = myArgs.getAutoArgs(*state);
 
     auto autoArgsWithInNixShell = autoArgs;
@@ -334,8 +340,13 @@ static void main_nix_build(int argc, char * * argv)
         exprs = {state->parseStdin()};
     else
         for (auto i : remainingArgs) {
+            auto baseDir = inShebang && !packages ? absPath(dirOf(script)) : i;
+
             if (fromArgs)
-                exprs.push_back(state->parseExprFromString(std::move(i), state->rootPath(".")));
+                exprs.push_back(state->parseExprFromString(
+                    std::move(i),
+                    (inShebang && compatibilitySettings.nixShellShebangArgumentsRelativeToScript) ? lookupFileArg(*state, baseDir) : state->rootPath(".")
+                ));
             else {
                 auto absolute = i;
                 try {
diff --git a/tests/functional/nix-shell.sh b/tests/functional/nix-shell.sh
index 65ff279f8..b9625eb66 100755
--- a/tests/functional/nix-shell.sh
+++ b/tests/functional/nix-shell.sh
@@ -65,6 +65,25 @@ chmod a+rx $TEST_ROOT/shell.shebang.sh
 output=$($TEST_ROOT/shell.shebang.sh abc def)
 [ "$output" = "foo bar abc def" ]
 
+# Test nix-shell shebang mode with an alternate working directory
+sed -e "s|@ENV_PROG@|$(type -P env)|" shell.shebang.expr > $TEST_ROOT/shell.shebang.expr
+chmod a+rx $TEST_ROOT/shell.shebang.expr
+# Should fail due to expressions using relative path
+! $TEST_ROOT/shell.shebang.expr bar
+cp shell.nix config.nix $TEST_ROOT
+# Should succeed
+echo "cwd: $PWD"
+output=$($TEST_ROOT/shell.shebang.expr bar)
+[ "$output" = foo ]
+
+# Test nix-shell shebang mode with an alternate working directory
+sed -e "s|@ENV_PROG@|$(type -P env)|" shell.shebang.legacy.expr > $TEST_ROOT/shell.shebang.legacy.expr
+chmod a+rx $TEST_ROOT/shell.shebang.legacy.expr
+# Should fail due to expressions using relative path
+mkdir -p "$TEST_ROOT/somewhere-unrelated"
+output="$(cd "$TEST_ROOT/somewhere-unrelated"; $TEST_ROOT/shell.shebang.legacy.expr bar;)"
+[[ $(realpath "$output") = $(realpath "$TEST_ROOT/somewhere-unrelated") ]]
+
 # Test nix-shell shebang mode again with metacharacters in the filename.
 # First word of filename is chosen to not match any file in the test root.
 sed -e "s|@ENV_PROG@|$(type -P env)|" shell.shebang.sh > $TEST_ROOT/spaced\ \\\'\"shell.shebang.sh
diff --git a/tests/functional/shell.nix b/tests/functional/shell.nix
index 750cdf0bc..9cae14b78 100644
--- a/tests/functional/shell.nix
+++ b/tests/functional/shell.nix
@@ -46,6 +46,7 @@ let pkgs = rec {
     ASCII_PERCENT = "%";
     ASCII_AT = "@";
     TEST_inNixShell = if inNixShell then "true" else "false";
+    FOO = fooContents;
     inherit stdenv;
     outputs = ["dev" "out"];
   } // {
diff --git a/tests/functional/shell.shebang.expr b/tests/functional/shell.shebang.expr
new file mode 100755
index 000000000..c602dedbf
--- /dev/null
+++ b/tests/functional/shell.shebang.expr
@@ -0,0 +1,9 @@
+#! @ENV_PROG@ nix-shell
+#! nix-shell "{ script, path, ... }: assert path == ./shell.nix; script { }"
+#! nix-shell --no-substitute
+#! nix-shell --expr 
+#! nix-shell --arg script "import ./shell.nix"
+#! nix-shell --arg path "./shell.nix"
+#! nix-shell -A shellDrv
+#! nix-shell -i bash
+echo "$FOO"
diff --git a/tests/functional/shell.shebang.legacy.expr b/tests/functional/shell.shebang.legacy.expr
new file mode 100755
index 000000000..490542f43
--- /dev/null
+++ b/tests/functional/shell.shebang.legacy.expr
@@ -0,0 +1,10 @@
+#! @ENV_PROG@ nix-shell
+#! nix-shell "{ script, path, ... }: assert path == ./shell.nix; script { fooContents = toString ./.; }"
+#! nix-shell --no-substitute
+#! nix-shell --expr
+#! nix-shell --arg script "import ((builtins.getEnv ''TEST_ROOT'')+''/shell.nix'')"
+#! nix-shell --arg path "./shell.nix"
+#! nix-shell -A shellDrv
+#! nix-shell -i bash
+#! nix-shell --option nix-shell-shebang-arguments-relative-to-script false
+echo "$FOO"