diff --git a/news/3935.fixed.md b/news/3935.fixed.md
new file mode 100644
index 0000000000..83cd0473e8
--- /dev/null
+++ b/news/3935.fixed.md
@@ -0,0 +1,4 @@
+(pypi) fixed the URL normalization function to correctly handle local paths
+enabling wheel sources files to point to an absolute path. Currently it supports
+the `file://<absolute_path>` for linux and windows like paths. We also support
+envsubst for the said paths from now on.
diff --git a/python/private/pypi/BUILD.bazel b/python/private/pypi/BUILD.bazel
index 8dd32afb9c..07d2300ce7 100644
--- a/python/private/pypi/BUILD.bazel
+++ b/python/private/pypi/BUILD.bazel
@@ -510,6 +510,12 @@ bzl_library(
     ],
 )
 
+bzl_library(
+    name = "urllib",
+    srcs = ["urllib.bzl"],
+    deps = ["//python/private:envsubst"],
+)
+
 bzl_library(
     name = "argparse",
     srcs = ["argparse.bzl"],
@@ -555,11 +561,6 @@ bzl_library(
     srcs = ["platform.bzl"],
 )
 
-bzl_library(
-    name = "urllib",
-    srcs = ["urllib.bzl"],
-)
-
 bzl_library(
     name = "version_from_filename",
     srcs = ["version_from_filename.bzl"],
diff --git a/python/private/pypi/urllib.bzl b/python/private/pypi/urllib.bzl
index ea4cd32cc9..0754334de9 100644
--- a/python/private/pypi/urllib.bzl
+++ b/python/private/pypi/urllib.bzl
@@ -1,5 +1,7 @@
 """Utilities for getting an absolute URL from index_url and the URL we find on PyPI index."""
 
+load("//python/private:envsubst.bzl", _envsubst = "envsubst")
+
 def _get_root_directory(url):
     scheme_end = url.find("://")
     if scheme_end == -1:
@@ -53,6 +55,12 @@ def _absolute_url(index_url, candidate):
     # relative path without up-references
     return "{}/{}".format(index_url.rstrip("/"), candidate)
 
+def _with_envsubst(url, envsubst = None, getenv = None):
+    if not url or not envsubst or not getenv:
+        return url
+
+    return _envsubst(url, envsubst, getenv)
+
 def _strip_empty_path_segments(url):
     """Removes empty path segments from a URL. Does nothing for urls with no scheme.
 
@@ -65,18 +73,23 @@ def _strip_empty_path_segments(url):
         The url with empty path segments removed and any trailing slash preserved.
         If the url had no scheme it is returned unchanged.
     """
-    scheme, _, rest = url.partition("://")
+    sep = "://"
+    scheme, _, rest = url.partition(sep)
+    if scheme.lower() == "file" and rest.startswith("/"):
+        sep = sep + "/"
+        rest = rest[1:]
+
     if rest == "":
         return url
     stripped = "/".join([p for p in rest.split("/") if p])
     if url.endswith("/"):
-        return "{}://{}/".format(scheme, stripped)
+        return "{}{}{}/".format(scheme, sep, stripped)
     else:
-        return "{}://{}".format(scheme, stripped)
+        return "{}{}{}".format(scheme, sep, stripped)
 
 urllib = struct(
     is_absolute = _is_downloadable,
     # Ensure that we strip empty path segments when making an absolute URL
-    absolute_url = lambda index_url, candidate: _strip_empty_path_segments(_absolute_url(index_url, candidate)),
+    absolute_url = lambda index_url, candidate, *, envsubst = None, getenv = None: _strip_empty_path_segments(_with_envsubst(_absolute_url(index_url, candidate), envsubst, getenv)),
     strip_empty_path_segments = _strip_empty_path_segments,
 )
diff --git a/python/private/pypi/whl_library.bzl b/python/private/pypi/whl_library.bzl
index 37cc36492e..1e75d69c8d 100644
--- a/python/private/pypi/whl_library.bzl
+++ b/python/private/pypi/whl_library.bzl
@@ -327,8 +327,10 @@ def _whl_library_impl(rctx):
         urls = rctx.attr.urls
         urls = [
             urllib.absolute_url(
-                envsubst(rctx.attr.index_url, rctx.attr.envsubst, rctx.getenv),
+                rctx.attr.index_url,
                 url,
+                envsubst = rctx.attr.envsubst,
+                getenv = rctx.getenv,
             )
             for url in urls
         ]
diff --git a/tests/pypi/urllib/urllib_tests.bzl b/tests/pypi/urllib/urllib_tests.bzl
index 40c48dc854..1a175dc120 100644
--- a/tests/pypi/urllib/urllib_tests.bzl
+++ b/tests/pypi/urllib/urllib_tests.bzl
@@ -8,7 +8,8 @@ _tests = []
 def _test_absolute_url(env):
     # Already absolute
     for already_absolute in [
-        "file://foo",
+        "file:///foo",
+        "file:///c:/foo",
         "https://foo.com",
         "http://foo.com",
     ]:
@@ -25,7 +26,13 @@ def _test_absolute_url(env):
     env.expect.that_str(urllib.absolute_url("https://example.com/relative/", "../relative/file.whl")).equals("https://example.com/relative/file.whl")
 
     # Relative URL for files
-    env.expect.that_str(urllib.absolute_url("file://{PYPI_BAZEL_WORKSPACE_ROOT}", "vendor/distro/file.whl")).equals("file://{PYPI_BAZEL_WORKSPACE_ROOT}/vendor/distro/file.whl")
+    env.expect.that_str(urllib.absolute_url("file://${PYPI_BAZEL_WORKSPACE_ROOT}", "vendor/distro/file.whl")).equals("file://${PYPI_BAZEL_WORKSPACE_ROOT}/vendor/distro/file.whl")
+    env.expect.that_str(urllib.absolute_url(
+        "file://${PYPI_BAZEL_WORKSPACE_ROOT}",
+        "vendor/distro/file.whl",
+        envsubst = ["PYPI_BAZEL_WORKSPACE_ROOT"],
+        getenv = {"PYPI_BAZEL_WORKSPACE_ROOT": "/some/dir"}.get,
+    )).equals("file:///some/dir/vendor/distro/file.whl")
 
 _tests.append(_test_absolute_url)
 
@@ -36,6 +43,7 @@ def _test_strip_empty_path_segments(env):
     env.expect.that_str(urllib.strip_empty_path_segments("scheme://with///multiple//empty/segments")).equals("scheme://with/multiple/empty/segments")
     env.expect.that_str(urllib.strip_empty_path_segments("scheme://with//trailing/slash/")).equals("scheme://with/trailing/slash/")
     env.expect.that_str(urllib.strip_empty_path_segments("scheme://with/trailing/slashes///")).equals("scheme://with/trailing/slashes/")
+    env.expect.that_str(urllib.strip_empty_path_segments("file:///home/user//foo")).equals("file:///home/user/foo")
 
 _tests.append(_test_strip_empty_path_segments)