diff --git a/utility/src/main/java/org/oppia/android/util/parser/html/CustomHtmlContentHandler.kt b/utility/src/main/java/org/oppia/android/util/parser/html/CustomHtmlContentHandler.kt
index bca56be075e..25cc7bf29d3 100644
--- a/utility/src/main/java/org/oppia/android/util/parser/html/CustomHtmlContentHandler.kt
+++ b/utility/src/main/java/org/oppia/android/util/parser/html/CustomHtmlContentHandler.kt
@@ -202,7 +202,7 @@ class CustomHtmlContentHandler private constructor(
      * Called when the closing of a custom tag is encountered. This does not support processing
      * attributes of the tag--[handleTag] should be used, instead.
      *
-     * This function will always be called before [handleClosingTag].
+     * This function will always be called before [handleTag].
      *
      * @param output the destination [Editable] to which spans can be added
      * @param indentation The zero-based indentation level of this item.
diff --git a/utility/src/main/java/org/oppia/android/util/parser/html/LiTagHandler.kt b/utility/src/main/java/org/oppia/android/util/parser/html/LiTagHandler.kt
index 849f2e226be..28321115984 100644
--- a/utility/src/main/java/org/oppia/android/util/parser/html/LiTagHandler.kt
+++ b/utility/src/main/java/org/oppia/android/util/parser/html/LiTagHandler.kt
@@ -1,9 +1,13 @@
 package org.oppia.android.util.parser.html
 
 import android.content.Context
+import android.graphics.Canvas
+import android.graphics.Paint
 import android.text.Editable
 import android.text.Spannable
 import android.text.Spanned
+import android.text.style.ImageSpan
+import androidx.core.view.ViewCompat
 import org.oppia.android.util.locale.OppiaLocale
 import org.xml.sax.Attributes
 import java.util.Stack
@@ -57,6 +61,76 @@ class LiTagHandler(
       }
       CUSTOM_LIST_LI_TAG -> latestPendingList?.closeItem(output)
     }
+    formatImageSpans(output)
+  }
+
+  /** Formats ImageSpans to ensure they render as block images with line breaks. */
+  private fun formatImageSpans(output: Editable) {
+    val imageSpans = output.getSpans(0, output.length, ImageSpan::class.java)
+
+    imageSpans.sortedByDescending { output.getSpanStart(it) }.forEach { span ->
+      val startIndex = output.getSpanStart(span)
+      val endIndex = output.getSpanEnd(span)
+
+      if (startIndex >= 0 && endIndex <= output.length) {
+        if (endIndex < output.length && output[endIndex] != '\n') {
+          output.insert(endIndex, "\n")
+        }
+        if (startIndex > 0 && output[startIndex - 1] != '\n') {
+          output.insert(startIndex, "\n")
+        }
+
+        val currentStart = output.getSpanStart(span)
+        val currentEnd = output.getSpanEnd(span)
+        val leadingMargins = output.getSpans(
+          currentStart,
+          currentStart,
+          ListItemLeadingMarginSpan::class.java
+        )
+        val totalMargin = leadingMargins.sumOf { it.getLeadingMargin(true) }
+        val isRtl by lazy {
+          displayLocale.getLayoutDirection() == ViewCompat.LAYOUT_DIRECTION_RTL
+        }
+
+        output.removeSpan(span)
+        val customSpan = CustomImageSpan(span, totalMargin, isRtl)
+        output.setSpan(
+          customSpan,
+          currentStart,
+          currentEnd,
+          output.getSpanFlags(span)
+        )
+      }
+    }
+  }
+
+  /**
+   * Custom [ImageSpan] that shifts the drawing position by the total margin of parent list items.
+   */
+  private class CustomImageSpan(
+    originalSpan: ImageSpan,
+    private val totalMargin: Int,
+    private val isRtl: Boolean
+  ) : ImageSpan(originalSpan.drawable, originalSpan.verticalAlignment) {
+
+    override fun draw(
+      canvas: Canvas,
+      text: CharSequence,
+      start: Int,
+      end: Int,
+      x: Float,
+      top: Int,
+      baseline: Int,
+      bottom: Int,
+      paint: Paint
+    ) {
+      val adjustedX = if (isRtl) {
+        x + totalMargin
+      } else {
+        x - totalMargin
+      }
+      super.draw(canvas, text, start, end, adjustedX, top, baseline, bottom, paint)
+    }
   }
 
   private sealed class ListTag<M : Mark<S>, S : ListItemLeadingMarginSpan>(
diff --git a/utility/src/test/java/org/oppia/android/util/parser/html/LiTagHandlerTest.kt b/utility/src/test/java/org/oppia/android/util/parser/html/LiTagHandlerTest.kt
index 487cda78b52..13246b7d2d8 100644
--- a/utility/src/test/java/org/oppia/android/util/parser/html/LiTagHandlerTest.kt
+++ b/utility/src/test/java/org/oppia/android/util/parser/html/LiTagHandlerTest.kt
@@ -4,6 +4,7 @@ import android.app.Application
 import android.content.Context
 import android.text.Html
 import android.text.Spannable
+import android.text.style.ImageSpan
 import androidx.test.core.app.ApplicationProvider
 import androidx.test.ext.junit.runners.AndroidJUnit4
 import com.google.common.truth.Truth.assertThat
@@ -113,6 +114,33 @@ class LiTagHandlerTest {
       .hasLength(2)
   }
 
+  @Test
+  fun testFromHtml_withImageSpanInsideList_insertsNewlinesAroundImage() {
+    val html = "<oppia-ul><oppia-li>Test<img src=\"test_source.png\"/>Image</oppia-li></oppia-ul>"
+    val displayLocale = createDisplayLocaleImpl(US_ENGLISH_CONTEXT)
+    val liTaghandler = LiTagHandler(context, displayLocale)
+    val parsedHtml =
+      CustomHtmlContentHandler.fromHtml(
+        html = html,
+        imageRetriever = mockImageRetriever,
+        customTagHandlers = mapOf(
+          CUSTOM_LIST_LI_TAG to liTaghandler,
+          CUSTOM_LIST_UL_TAG to liTaghandler
+        )
+      )
+
+    val imageSpans = parsedHtml.getSpans(0, parsedHtml.length, ImageSpan::class.java)
+    assertThat(imageSpans).hasLength(1)
+    val imageSpan = imageSpans[0]
+    val start = parsedHtml.getSpanStart(imageSpan)
+    val end = parsedHtml.getSpanEnd(imageSpan)
+
+    assertThat(parsedHtml[start - 1]).isEqualTo('\n')
+    assertThat(parsedHtml[end]).isEqualTo('\n')
+    assertThat(parsedHtml.toString()).contains("Test")
+    assertThat(parsedHtml.toString()).contains("Image")
+  }
+
   @Test
   fun testCustomListElement_betweenNestedParagraphs_parsesCorrectlyIntoNumberedListSpan() {
     val displayLocale = createDisplayLocaleImpl(US_ENGLISH_CONTEXT)