diff --git a/internal/resources/policy/kind/custom/recipe/tmc_custom_schema.go b/internal/resources/policy/kind/custom/recipe/tmc_custom_schema.go
index 5f2462186..4a4acdf7b 100644
--- a/internal/resources/policy/kind/custom/recipe/tmc_custom_schema.go
+++ b/internal/resources/policy/kind/custom/recipe/tmc_custom_schema.go
@@ -20,6 +20,7 @@ import (
 	policyrecipecustomcommonmodel "github.com/vmware/terraform-provider-tanzu-mission-control/internal/models/policy/recipe/custom/common"
 	recipemodels "github.com/vmware/terraform-provider-tanzu-mission-control/internal/models/recipe"
 	"github.com/vmware/terraform-provider-tanzu-mission-control/internal/resources/policy/kind/common"
+	clienterrors "github.com/vmware/terraform-provider-tanzu-mission-control/internal/client/errors"
 )
 
 var TMCCustomSchema = &schema.Schema{
@@ -117,7 +118,11 @@ func ValidateCustomRecipe(config authctx.TanzuContext, customRecipe map[string]i
 	recipeData, err := config.TMCConnection.RecipeResourceService.RecipeResourceServiceGet(recipeModel)
 
 	if err != nil {
-		errMessages = append(errMessages, err.Error())
+		// NOTE: If error is 404 not found then do not fail the planning. This fix ensures that if user tries to create the new custom template
+		// and assign the same template to the custom policy in a single terraform apply operation will be able to proceed, instead of failing in the planning phase.
+		if !clienterrors.IsNotFoundError(err) {
+			errMessages = append(errMessages, err.Error())
+		}
 	} else {
 		errs := ValidateRecipeParameters(recipeData.Recipe.Spec.InputSchema, customRecipe[ParametersKey].(string))