diff --git a/erpnext/accounts/doctype/payment_entry/payment_entry.py b/erpnext/accounts/doctype/payment_entry/payment_entry.py
index 21adb2759b44..29b52729cd34 100644
--- a/erpnext/accounts/doctype/payment_entry/payment_entry.py
+++ b/erpnext/accounts/doctype/payment_entry/payment_entry.py
@@ -277,12 +277,13 @@ def validate_allocated_amount_with_latest_data(self):
 
 			fail_message = _("Row #{0}: Allocated Amount cannot be greater than outstanding amount.")
 
-			if (flt(d.allocated_amount)) > 0 and flt(d.allocated_amount) > flt(latest.outstanding_amount):
-				frappe.throw(fail_message.format(d.idx))
-
-			if d.payment_term and (
-				(flt(d.allocated_amount)) > 0
-				and flt(d.allocated_amount) > flt(latest.payment_term_outstanding)
+			if (
+				d.payment_term
+				and (
+					(flt(d.allocated_amount)) > 0
+					and flt(d.allocated_amount) > flt(latest.payment_term_outstanding)
+				)
+				and self.term_based_allocation_enabled_for_reference(d.reference_doctype, d.reference_name)
 			):
 				frappe.throw(
 					_(
@@ -292,6 +293,9 @@ def validate_allocated_amount_with_latest_data(self):
 					)
 				)
 
+			if (flt(d.allocated_amount)) > 0 and flt(d.allocated_amount) > flt(latest.outstanding_amount):
+				frappe.throw(fail_message.format(d.idx))
+
 			# Check for negative outstanding invoices as well
 			if flt(d.allocated_amount) < 0 and flt(d.allocated_amount) < flt(latest.outstanding_amount):
 				frappe.throw(fail_message.format(d.idx))
diff --git a/erpnext/accounts/doctype/payment_entry/test_payment_entry.py b/erpnext/accounts/doctype/payment_entry/test_payment_entry.py
index c6e93f3f7a29..dc44fc359cca 100644
--- a/erpnext/accounts/doctype/payment_entry/test_payment_entry.py
+++ b/erpnext/accounts/doctype/payment_entry/test_payment_entry.py
@@ -1156,6 +1156,52 @@ def test_overallocation_validation_on_payment_terms(self):
 		si3.cancel()
 		si3.delete()
 
+	@change_settings(
+		"Accounts Settings",
+		{
+			"unlink_payment_on_cancellation_of_invoice": 1,
+			"delete_linked_ledger_entries": 1,
+			"allow_multi_currency_invoices_against_single_party_account": 1,
+		},
+	)
+	def test_overallocation_validation_shouldnt_misfire(self):
+		"""
+		Overallocation validation shouldn't fire for Template without "Allocate Payment based on Payment Terms" enabled
+
+		"""
+		customer = create_customer()
+		create_payment_terms_template()
+
+		template = frappe.get_doc("Payment Terms Template", "Test Receivable Template")
+		template.allocate_payment_based_on_payment_terms = 0
+		template.save()
+
+		# Validate allocation on base/company currency
+		si = create_sales_invoice(do_not_save=1, qty=1, rate=200)
+		si.payment_terms_template = "Test Receivable Template"
+		si.save().submit()
+
+		si.reload()
+		pe = get_payment_entry(si.doctype, si.name).save()
+		# There will no term based allocation
+		self.assertEqual(len(pe.references), 1)
+		self.assertEqual(pe.references[0].payment_term, None)
+		self.assertEqual(flt(pe.references[0].allocated_amount), flt(si.grand_total))
+		pe.save()
+
+		# specify a term
+		pe.references[0].payment_term = template.terms[0].payment_term
+		# no validation error should be thrown
+		pe.save()
+
+		pe.paid_amount = si.grand_total + 1
+		pe.references[0].allocated_amount = si.grand_total + 1
+		self.assertRaises(frappe.ValidationError, pe.save)
+
+		template = frappe.get_doc("Payment Terms Template", "Test Receivable Template")
+		template.allocate_payment_based_on_payment_terms = 1
+		template.save()
+
 
 def create_payment_entry(**args):
 	payment_entry = frappe.new_doc("Payment Entry")