diff --git a/examples/pytest/BUILD.bazel b/examples/pytest/BUILD.bazel
index 41b34215..25889c14 100644
--- a/examples/pytest/BUILD.bazel
+++ b/examples/pytest/BUILD.bazel
@@ -22,3 +22,21 @@ py_test(
         "@pypi_pytest//:pkg",
     ],
 )
+
+py_test(
+    name = "nested/pytest",
+    srcs = [
+        "foo_test.py",
+        ":__test__",
+    ],
+    env_inherit = ["FOO"],
+    imports = ["../.."],
+    main = ":__test__.py",
+    package_collisions = "warning",
+    deps = [
+        ":__test__",
+        "@pypi_ftfy//:pkg",
+        "@pypi_neptune//:pkg",
+        "@pypi_pytest//:pkg",
+    ],
+)
diff --git a/py/private/py_binary.bzl b/py/private/py_binary.bzl
index 575ff1ce..73485d26 100644
--- a/py/private/py_binary.bzl
+++ b/py/private/py_binary.bzl
@@ -32,7 +32,9 @@ def _py_binary_rule_impl(ctx):
     # each segment from site-packages in the venv to the root of the runfiles tree.
     # Five .. will get us back to the root of the venv:
     # {name}.runfiles/.{name}.venv/lib/python{version}/site-packages/first_party.pth
-    escape = "/".join(([".."] * 4))
+    # If the target is defined with a slash, it adds to the level of nesting
+    target_depth = len(ctx.label.name.split("/")) - 1
+    escape = "/".join(([".."] * (4 + target_depth)))
 
     # A few imports rely on being able to reference the root of the runfiles tree as a Python module,
     # the common case here being the @rules_python//python/runfiles target that adds the runfiles helper,