diff --git a/pkg/env/env.go b/pkg/env/env.go
index bd4bed0f21..80b13ed684 100644
--- a/pkg/env/env.go
+++ b/pkg/env/env.go
@@ -32,7 +32,6 @@ const whiteSpaces = " \t"
 func DefaultEnvVariables() map[string]string {
 	return map[string]string{
 		"PATH":      "/usr/local/sbin:/usr/local/bin:/usr/sbin:/usr/bin:/sbin:/bin",
-		"TERM":      "xterm",
 		"container": "podman",
 	}
 }
diff --git a/pkg/specgen/generate/container.go b/pkg/specgen/generate/container.go
index c43d61f821..a9ce054006 100644
--- a/pkg/specgen/generate/container.go
+++ b/pkg/specgen/generate/container.go
@@ -130,6 +130,12 @@ func CompleteSpec(ctx context.Context, r *libpod.Runtime, s *specgen.SpecGenerat
 		defaultEnvs = envLib.Join(envLib.DefaultEnvVariables(), envLib.Join(defaultEnvs, envs))
 	}
 
+	// add default terminal to env if tty flag is set
+	_, ok := defaultEnvs["TERM"]
+	if s.Terminal && !ok {
+		defaultEnvs["TERM"] = "xterm"
+	}
+
 	for _, e := range s.EnvMerge {
 		processedWord, err := imagebuilder.ProcessWord(e, envLib.Slice(defaultEnvs))
 		if err != nil {
diff --git a/test/system/030-run.bats b/test/system/030-run.bats
index 3f26624267..1a1c53de7b 100644
--- a/test/system/030-run.bats
+++ b/test/system/030-run.bats
@@ -822,9 +822,18 @@ EOF
 
 @test "podman run defaultenv" {
     run_podman run --rm $IMAGE printenv
-    assert "$output" =~ "TERM=xterm" "env includes TERM"
+    assert "$output" !~ "TERM=" "env doesn't include TERM by default"
     assert "$output" =~ "container=podman" "env includes container=podman"
 
+    run_podman 1 run -t=false --rm $IMAGE printenv TERM
+    assert "$output" == "" "env doesn't include TERM"
+
+    run_podman run -t=true --rm $IMAGE printenv TERM    # uses CRLF terminators
+    assert "$output" == $'xterm\r' "env includes default TERM"
+
+    run_podman run -t=false -e TERM=foobar --rm $IMAGE printenv TERM
+    assert "$output" == "foobar" "env includes TERM"
+
     run_podman run --unsetenv=TERM --rm $IMAGE printenv
     assert "$output" =~ "container=podman" "env includes container=podman"
     assert "$output" != "TERM" "unwanted TERM environment variable despite --unsetenv=TERM"
diff --git a/test/system/700-play.bats b/test/system/700-play.bats
index bc2f69a0e6..2c3b0b6cf0 100644
--- a/test/system/700-play.bats
+++ b/test/system/700-play.bats
@@ -372,7 +372,6 @@ _EOF
     is "$output" bin "expect container within pod to run as the bin user"
     run_podman inspect --format "{{ .Config.Env }}" test_pod-test
     is "$output" ".*PATH=/usr/local/sbin:/usr/local/bin:/usr/sbin:/usr/bin:/sbin:/bin.*" "expect PATH to be set"
-    is "$output" ".*TERM=xterm.*" "expect TERM to be set"
     is "$output" ".*container=podman.*" "expect container to be set"
 
     run_podman stop -a -t 0