diff --git a/src/openedx_tagging/rest_api/v1/serializers.py b/src/openedx_tagging/rest_api/v1/serializers.py
index 9c5b62a06..92720cd3f 100644
--- a/src/openedx_tagging/rest_api/v1/serializers.py
+++ b/src/openedx_tagging/rest_api/v1/serializers.py
@@ -218,15 +218,25 @@ class ObjectTagUpdateBodySerializer(serializers.Serializer):  # pylint: disable=
     tagsData = serializers.ListField(child=ObjectTagUpdateByTaxonomySerializer(), required=True)
 
 
-def validate_tag_value(value, context):
+def validate_tag_value(value, context, original_value=None):
     """
-    Validate this tag value is unique within the current taxonomy context and
-    does not contain forbidden characters.
+    Validates the incoming request early:
+    - This tag is unique, not a duplicate. (The model only validates this if you call `full_clean()`.)
+    - There are no forbidden / reserved characters present. There is an additional
+    model-side validation for this as well, but we are keeping this so we can validate
+    the incoming request immediately.
     """
     taxonomy_id = context.get("taxonomy_id")
+    original_tag = Tag.objects.filter(taxonomy_id=taxonomy_id, value=original_value).first() if original_value else None
+    tag_id = original_tag.pk if original_tag else None
     if taxonomy_id is not None:
-        # Check if tag value already exists within this taxonomy. If so, raise a validation error.
         queryset = Tag.objects.filter(taxonomy_id=taxonomy_id, value=value)
+
+        # Don't compare tag against itself when validating its updated value.
+        if tag_id:
+            queryset = queryset.exclude(pk=tag_id)
+
+        # Check if tag value already exists within this taxonomy. If so, raise a validation error.
         if queryset.exists():
             raise serializers.ValidationError(
                 f'Tag value "{value}" already exists in this taxonomy.', code='unique'
@@ -350,7 +360,7 @@ def validate_updated_tag_value(self, value):
         """
         Run validations for the updated tag value.
         """
-        return validate_tag_value(value, self.context)
+        return validate_tag_value(value, self.context, original_value=self.initial_data.get("tag"))
 
 
 class TaxonomyTagDeleteBodySerializer(serializers.Serializer):  # pylint: disable=abstract-method
diff --git a/tests/openedx_tagging/test_views.py b/tests/openedx_tagging/test_views.py
index a7510d6ac..9851ce0d3 100644
--- a/tests/openedx_tagging/test_views.py
+++ b/tests/openedx_tagging/test_views.py
@@ -2211,6 +2211,35 @@ def test_update_tag_with_duplicate_value(self):
         # Check that the error message indicates the duplicate value issue
         assert "Tag value \"Updated Tag\" already exists in this taxonomy" in str(response.data)
 
+    def test_update_tag_change_capitalization(self):
+        """
+        Test that renaming a tag by only changing its capitalization is allowed.
+        """
+        self.client.force_authenticate(user=self.staff)
+        existing_tag = self.small_taxonomy.tag_set.filter(parent=None).first()
+
+        # Avoiding false positives
+        assert existing_tag.value is not existing_tag.value.upper()
+
+        update_data = {
+            "tag": existing_tag.value,
+            "updated_tag_value": existing_tag.value.upper()
+        }
+
+        response = self.client.put(
+            self.small_taxonomy_url, update_data, format="json"
+        )
+
+        assert response.status_code == status.HTTP_200_OK
+
+        data = response.data
+
+        # Check that Tag value got updated with the new capitalization
+        self.assertEqual(data.get("_id"), existing_tag.id)
+        self.assertEqual(data.get("value"), existing_tag.value.upper())
+        self.assertEqual(data.get("parent_value"), existing_tag.parent)
+        self.assertEqual(data.get("external_id"), existing_tag.external_id)
+
     def test_should_handle_unexpected_errors_gracefully(self):
         """
         Test that if any unexpected error occurs during the processing of the request,