diff --git a/e2e/functionalities/hidden-peer-dependencies.e2e.ts b/e2e/functionalities/hidden-peer-dependencies.e2e.ts
new file mode 100644
index 000000000000..af0881c07cc0
--- /dev/null
+++ b/e2e/functionalities/hidden-peer-dependencies.e2e.ts
@@ -0,0 +1,64 @@
+import path from 'path';
+import { expect } from 'chai';
+import fs from 'fs-extra';
+import { Helper } from '@teambit/legacy.e2e-helper';
+import { resolveFrom } from '@teambit/toolbox.modules.module-resolver';
+
+describe('hidden peer dependency via env.jsonc', function () {
+  this.timeout(0);
+  let helper: Helper;
+  let workspaceCapsulesRootDir: string;
+  const peerPkgName = 'is-odd';
+
+  before(() => {
+    helper = new Helper();
+    helper.scopeHelper.reInitWorkspace();
+    // create a single component comp1
+    helper.fixtures.populateComponents(1);
+    // ensure comp1 actually requires is-odd so it's considered a used peer
+    helper.fs.appendFile('comp1/index.js', 'const isOdd = require("is-odd");');
+    // create env with hidden is-odd peer
+    helper.env.setCustomNewEnv(
+      undefined,
+      undefined,
+      {
+        policy: {
+          peers: [
+            {
+              name: peerPkgName,
+              version: '1.0.0',
+              supportedRange: '*',
+              hidden: true,
+            },
+          ],
+        },
+      },
+      false,
+      'custom-env/env1',
+      'custom-env/env1'
+    );
+    // apply env to comp1
+    helper.extensions.addExtensionToVariant('comp1', `${helper.scopes.remote}/custom-env/env1`, {});
+    helper.extensions.addExtensionToVariant('custom-env', 'teambit.envs/env', {});
+    helper.extensions.workspaceJsonc.addKeyValToDependencyResolver('rootComponents', true);
+    helper.command.install('--add-missing-deps');
+    helper.command.build('--skip-tests');
+    workspaceCapsulesRootDir = helper.command.capsuleListParsed().workspaceCapsulesRootDir;
+  });
+
+  after(() => {
+    helper.scopeHelper.destroy();
+  });
+
+  it('should have is-odd/package.json present in the workspace root node_modules', () => {
+    const isOddPkgJsonPath = resolveFrom(helper.fixtures.scopes.localPath, ['is-odd/package.json']);
+    expect(fs.existsSync(isOddPkgJsonPath)).to.be.true;
+  });
+
+  it('should exclude is-odd from capsule package.json peerDependencies', () => {
+    const pkgJsonPath = path.join(workspaceCapsulesRootDir, `${helper.scopes.remote}_comp1/package.json`);
+    const pkgJson = fs.readJsonSync(pkgJsonPath);
+    const peerDeps = pkgJson.peerDependencies || {};
+    expect(peerDeps[peerPkgName]).to.be.undefined;
+  });
+});
diff --git a/scopes/component/isolator/isolator.main.runtime.ts b/scopes/component/isolator/isolator.main.runtime.ts
index 61ca506e1f17..af2489c5ae84 100644
--- a/scopes/component/isolator/isolator.main.runtime.ts
+++ b/scopes/component/isolator/isolator.main.runtime.ts
@@ -1340,10 +1340,28 @@ export class IsolatorMain {
     addDependencies(packageJson);
     const currentVersion = getComponentPackageVersion(component);
     packageJson.addOrUpdateProperty('version', currentVersion);
+    this.removeHiddenPeerDependencies(packageJson, component);
 
     return packageJson;
   }
 
+  /**
+   * Remove peers that are marked as hidden in env.jsonc/policies for capsules only.
+   * This keeps these peers in workspace installs, while omitting them from capsule package.json.
+   */
+  private removeHiddenPeerDependencies(packageJson: PackageJsonFile, component: Component) {
+    if (Object.keys(packageJson.packageJsonObject.peerDependencies ?? {}).length === 0) {
+      return;
+    }
+    const hiddenPeers = this.dependencyResolver.getHiddenPeerDependencies(component);
+    hiddenPeers.forEach((dep) => {
+      const peerName = dep.getPackageName?.();
+      if (peerName) {
+        delete packageJson.packageJsonObject.peerDependencies[peerName];
+      }
+    });
+  }
+
   /**
    * currently, it writes all artifacts.
    * later, this responsibility might move to pkg extension, which could write only artifacts
diff --git a/scopes/dependencies/dependency-resolver/dependencies/dependency-list.ts b/scopes/dependencies/dependency-resolver/dependencies/dependency-list.ts
index 4992be8a578e..538aee77758b 100644
--- a/scopes/dependencies/dependency-resolver/dependencies/dependency-list.ts
+++ b/scopes/dependencies/dependency-resolver/dependencies/dependency-list.ts
@@ -122,6 +122,10 @@ export class DependencyList {
     return this.filter((dep) => !dep.hidden);
   }
 
+  getHiddenPeers(): DependencyList {
+    return this.filter((dep) => dep.hidden === true && dep.lifecycle === 'peer');
+  }
+
   toTypeArray<T extends Dependency>(typeName: string): T[] {
     const list: T[] = this.dependencies.filter((dep) => dep.type === typeName) as any as T[];
     return list;
diff --git a/scopes/dependencies/dependency-resolver/dependency-resolver.main.runtime.ts b/scopes/dependencies/dependency-resolver/dependency-resolver.main.runtime.ts
index 35805d76cf47..4060d47e81bf 100644
--- a/scopes/dependencies/dependency-resolver/dependency-resolver.main.runtime.ts
+++ b/scopes/dependencies/dependency-resolver/dependency-resolver.main.runtime.ts
@@ -376,6 +376,16 @@ export class DependencyResolverMain {
     return depList.filterHidden();
   }
 
+  getHiddenPeerDependencies(component: IComponent): DependencyList {
+    const entry = component.get(DependencyResolverAspect.id);
+    if (!entry) {
+      return DependencyList.fromArray([]);
+    }
+    const serializedDependencies: SerializedDependency[] = entry?.data?.dependencies || [];
+    const depList = this.getDependenciesFromSerializedDependencies(serializedDependencies);
+    return depList.getHiddenPeers();
+  }
+
   getDependenciesFromLegacyComponent(
     component: LegacyComponent,
     { includeHidden = false }: GetDependenciesOptions = {}