diff --git a/packages/next-swc/crates/next-core/src/next_client/context.rs b/packages/next-swc/crates/next-core/src/next_client/context.rs
index 50ae600e6c657..48408f8101968 100644
--- a/packages/next-swc/crates/next-core/src/next_client/context.rs
+++ b/packages/next-swc/crates/next-core/src/next_client/context.rs
@@ -23,9 +23,11 @@ use turbo_binding::{
         env::ProcessEnvAssetVc,
         node::execution_context::ExecutionContextVc,
         turbopack::{
+            condition::ContextCondition,
             module_options::{
                 module_options_context::{ModuleOptionsContext, ModuleOptionsContextVc},
-                PostCssTransformOptions, WebpackLoadersOptions,
+                JsxTransformOptions, PostCssTransformOptions, TypescriptTransformOptions,
+                WebpackLoadersOptions,
             },
             resolve_options_context::{ResolveOptionsContext, ResolveOptionsContextVc},
             transition::TransitionsByNameVc,
@@ -34,10 +36,12 @@ use turbo_binding::{
     },
 };
 use turbo_tasks::{primitives::StringVc, Value};
+use turbo_tasks_fs::FileSystem;
 
 use super::transforms::get_next_client_transforms_rules;
 use crate::{
     babel::maybe_add_babel_loader,
+    embed_js::next_js_fs,
     env::env_for_js,
     next_build::{get_external_next_compiled_package_mapping, get_postcss_package_mapping},
     next_client::runtime_entry::{RuntimeEntriesVc, RuntimeEntry},
@@ -219,10 +223,23 @@ pub async fn get_client_module_options_context(
         enable_typescript_transform: Some(tsconfig),
         enable_mdx_rs: mdx_rs_options,
         decorators: Some(decorators_options),
-        rules: vec![(
-            foreign_code_context_condition(next_config).await?,
-            module_options_context.clone().cell(),
-        )],
+        rules: vec![
+            (
+                foreign_code_context_condition(next_config).await?,
+                module_options_context.clone().cell(),
+            ),
+            // If the module is an internal asset (i.e overlay, fallback) coming from the embedded
+            // FS, don't apply user defined transforms.
+            (
+                ContextCondition::InPath(next_js_fs().root()),
+                ModuleOptionsContext {
+                    enable_typescript_transform: Some(TypescriptTransformOptions::default().cell()),
+                    enable_jsx: Some(JsxTransformOptions::default().cell()),
+                    ..module_options_context.clone()
+                }
+                .cell(),
+            ),
+        ],
         custom_rules,
         ..module_options_context
     }
diff --git a/packages/next-swc/crates/next-core/src/next_server/context.rs b/packages/next-swc/crates/next-core/src/next_server/context.rs
index 813fb1350aca7..574d2081c85a2 100644
--- a/packages/next-swc/crates/next-core/src/next_server/context.rs
+++ b/packages/next-swc/crates/next-core/src/next_server/context.rs
@@ -17,21 +17,24 @@ use turbo_binding::{
         ecmascript::EcmascriptInputTransform,
         node::execution_context::ExecutionContextVc,
         turbopack::{
+            condition::ContextCondition,
             module_options::{
-                ModuleOptionsContext, ModuleOptionsContextVc, PostCssTransformOptions,
-                WebpackLoadersOptions,
+                JsxTransformOptions, ModuleOptionsContext, ModuleOptionsContextVc,
+                PostCssTransformOptions, TypescriptTransformOptions, WebpackLoadersOptions,
             },
             resolve_options_context::{ResolveOptionsContext, ResolveOptionsContextVc},
         },
     },
 };
 use turbo_tasks::{primitives::StringVc, Value};
+use turbo_tasks_fs::FileSystem;
 
 use super::{
     resolve::ExternalCjsModulesResolvePluginVc, transforms::get_next_server_transforms_rules,
 };
 use crate::{
     babel::maybe_add_babel_loader,
+    embed_js::next_js_fs,
     next_build::{get_external_next_compiled_package_mapping, get_postcss_package_mapping},
     next_config::NextConfigVc,
     next_import_map::get_next_server_import_map,
@@ -270,6 +273,13 @@ pub async fn get_server_module_options_context(
                 execution_context: Some(execution_context),
                 ..Default::default()
             };
+
+            let internal_module_options_context = ModuleOptionsContext {
+                enable_typescript_transform: Some(TypescriptTransformOptions::default().cell()),
+                enable_jsx: Some(JsxTransformOptions::default().cell()),
+                ..module_options_context.clone()
+            };
+
             ModuleOptionsContext {
                 enable_jsx: Some(jsx_runtime_options),
                 enable_styled_jsx: true,
@@ -280,10 +290,16 @@ pub async fn get_server_module_options_context(
                 enable_typescript_transform: Some(tsconfig),
                 enable_mdx_rs: mdx_rs_options,
                 decorators: Some(decorators_options),
-                rules: vec![(
-                    foreign_code_context_condition,
-                    module_options_context.clone().cell(),
-                )],
+                rules: vec![
+                    (
+                        foreign_code_context_condition,
+                        module_options_context.clone().cell(),
+                    ),
+                    (
+                        ContextCondition::InPath(next_js_fs().root()),
+                        internal_module_options_context.cell(),
+                    ),
+                ],
                 custom_rules,
                 ..module_options_context
             }
@@ -298,6 +314,11 @@ pub async fn get_server_module_options_context(
                 execution_context: Some(execution_context),
                 ..Default::default()
             };
+            let internal_module_options_context = ModuleOptionsContext {
+                enable_typescript_transform: Some(TypescriptTransformOptions::default().cell()),
+                ..module_options_context.clone()
+            };
+
             ModuleOptionsContext {
                 enable_jsx: Some(jsx_runtime_options),
                 enable_styled_jsx: true,
@@ -308,10 +329,16 @@ pub async fn get_server_module_options_context(
                 enable_typescript_transform: Some(tsconfig),
                 enable_mdx_rs: mdx_rs_options,
                 decorators: Some(decorators_options),
-                rules: vec![(
-                    foreign_code_context_condition,
-                    module_options_context.clone().cell(),
-                )],
+                rules: vec![
+                    (
+                        foreign_code_context_condition,
+                        module_options_context.clone().cell(),
+                    ),
+                    (
+                        ContextCondition::InPath(next_js_fs().root()),
+                        internal_module_options_context.cell(),
+                    ),
+                ],
                 custom_rules,
                 ..module_options_context
             }
@@ -332,6 +359,10 @@ pub async fn get_server_module_options_context(
                 execution_context: Some(execution_context),
                 ..Default::default()
             };
+            let internal_module_options_context = ModuleOptionsContext {
+                enable_typescript_transform: Some(TypescriptTransformOptions::default().cell()),
+                ..module_options_context.clone()
+            };
             ModuleOptionsContext {
                 enable_jsx: Some(jsx_runtime_options),
                 enable_emotion,
@@ -341,10 +372,16 @@ pub async fn get_server_module_options_context(
                 enable_typescript_transform: Some(tsconfig),
                 enable_mdx_rs: mdx_rs_options,
                 decorators: Some(decorators_options),
-                rules: vec![(
-                    foreign_code_context_condition,
-                    module_options_context.clone().cell(),
-                )],
+                rules: vec![
+                    (
+                        foreign_code_context_condition,
+                        module_options_context.clone().cell(),
+                    ),
+                    (
+                        ContextCondition::InPath(next_js_fs().root()),
+                        internal_module_options_context.cell(),
+                    ),
+                ],
                 custom_rules,
                 ..module_options_context
             }
@@ -354,16 +391,26 @@ pub async fn get_server_module_options_context(
                 execution_context: Some(execution_context),
                 ..Default::default()
             };
+            let internal_module_options_context = ModuleOptionsContext {
+                enable_typescript_transform: Some(TypescriptTransformOptions::default().cell()),
+                ..module_options_context.clone()
+            };
             ModuleOptionsContext {
                 enable_postcss_transform,
                 enable_webpack_loaders,
                 enable_typescript_transform: Some(tsconfig),
                 enable_mdx_rs: mdx_rs_options,
                 decorators: Some(decorators_options),
-                rules: vec![(
-                    foreign_code_context_condition,
-                    module_options_context.clone().cell(),
-                )],
+                rules: vec![
+                    (
+                        foreign_code_context_condition,
+                        module_options_context.clone().cell(),
+                    ),
+                    (
+                        ContextCondition::InPath(next_js_fs().root()),
+                        internal_module_options_context.cell(),
+                    ),
+                ],
                 custom_rules,
                 ..module_options_context
             }
@@ -373,6 +420,10 @@ pub async fn get_server_module_options_context(
                 execution_context: Some(execution_context),
                 ..Default::default()
             };
+            let internal_module_options_context = ModuleOptionsContext {
+                enable_typescript_transform: Some(TypescriptTransformOptions::default().cell()),
+                ..module_options_context.clone()
+            };
             ModuleOptionsContext {
                 enable_jsx: Some(jsx_runtime_options),
                 enable_emotion,
@@ -383,10 +434,16 @@ pub async fn get_server_module_options_context(
                 enable_typescript_transform: Some(tsconfig),
                 enable_mdx_rs: mdx_rs_options,
                 decorators: Some(decorators_options),
-                rules: vec![(
-                    foreign_code_context_condition,
-                    module_options_context.clone().cell(),
-                )],
+                rules: vec![
+                    (
+                        foreign_code_context_condition,
+                        module_options_context.clone().cell(),
+                    ),
+                    (
+                        ContextCondition::InPath(next_js_fs().root()),
+                        internal_module_options_context.cell(),
+                    ),
+                ],
                 custom_rules,
                 ..module_options_context
             }