diff --git a/grade/report/grader/lib.php b/grade/report/grader/lib.php
index 8f0f549fe9a46..45c90d90b9ce2 100644
--- a/grade/report/grader/lib.php
+++ b/grade/report/grader/lib.php
@@ -243,24 +243,27 @@ public function process_data($data) {
 
                         // Detect changes in exemption checkbox.
                         if ($oldvalue->can_apply_penalty_to_overridden_mark()) {
-                            $exemptionchanged = isset($data->exemption[$userid][$itemid]) !=
-                                !$oldvalue->is_penalty_applied_to_overridden_mark();
+                            if (!isset($data->exemption[$userid][$itemid])) {
+                                $newvalue = format_float($postedvalue - $oldvalue->deductedmark,
+                                    $oldvalue->grade_item->get_decimals());
+                            } else {
+                                $newvalue = $postedvalue;
+                            }
                         } else {
-                            $exemptionchanged = false;
+                            $newvalue = $postedvalue;
                         }
 
                         // If the grade item uses a custom scale
                         if (!empty($oldvalue->grade_item->scaleid)) {
 
-                            if ((int)$oldvalue->finalgrade === (int)$postedvalue && !$exemptionchanged) {
+                            if ((int)$oldvalue->finalgrade === (int)$newvalue) {
                                 continue;
                             }
                         } else {
                             // The grade item uses a numeric scale
 
                             // Format the finalgrade from the DB so that it matches the grade from the client
-                            if ($postedvalue === format_float($oldvalue->finalgrade, $oldvalue->grade_item->get_decimals())
-                                && !$exemptionchanged) {
+                            if ($newvalue === format_float($oldvalue->finalgrade, $oldvalue->grade_item->get_decimals())) {
                                 continue;
                             }
                         }
@@ -335,15 +338,17 @@ public function process_data($data) {
                         }
                     }
 
+                    // Save final grade, without penalty.
                     $gradeitem->update_final_grade($userid, $finalgrade, 'gradebook', false,
                         FORMAT_MOODLE, null, null, true);
 
-                    // Save overridden mark.
+                    // Save overridden mark, without penalty.
                     $gradeitem->update_overridden_mark($userid, $finalgrade);
 
                     // Apply penalty.
                     if ($oldvalue->can_apply_penalty_to_overridden_mark() && !isset($data->exemption[$userid][$itemid])) {
-                        $gradeitem->update_final_grade($userid, $finalgrade - $oldvalue->deductedmark, 'gradepenalty', false,
+                        // Apply penalty.
+                        $gradeitem->update_final_grade($userid, $newvalue, 'gradepenalty', false,
                             FORMAT_MOODLE, null, null, true);
                     }
                 }
@@ -1168,12 +1173,19 @@ public function get_right_rows(bool $displayaverages): array {
                             // Show option for user to apply penalty or not.
                             if ($grade->can_apply_penalty_to_overridden_mark()) {
                                 $context->canapplypenalty = true;
+                                if ($grade->is_penalty_applied_to_final_grade()) {
+                                    // We are editing the original grade value, ie, before applying penalty.
+                                    $context->value = format_float($gradeval + $grade->deductedmark, $decimalpoints);
+                                } else {
+                                    $context->value = $value;
+                                }
+                                // Current grade.
+                                $context->effectivegrade = $value;
                                 $context->deductedmark = format_float($grade->deductedmark, $decimalpoints);
-                                $context->penaltyexempted = !$grade->is_penalty_applied_to_overridden_mark();
+                                $context->penaltyexempted = !$grade->is_penalty_applied_to_final_grade();
                                 $context->exemptionid = 'exemption' . $userid . '_' . $item->id;
                                 $context->exemptionname = 'exemption[' . $userid . '][' . $item->id .']';
-                                $context->exemptionlabel = get_string('applypenaltytext', 'gradereport_grader');
-                                $context->exemptionarialabel = $gradelabel . ' ' .
+                                $context->exemptionlabel = $gradelabel . ' ' .
                                     get_string('applypenaltytext', 'gradereport_grader');
                                 $context->exemptiontooltip = get_string('applypenaltytooltip', 'gradereport_grader');
                             }
diff --git a/grade/report/grader/templates/cell.mustache b/grade/report/grader/templates/cell.mustache
index 293a709a4be7b..7dee1873929f0 100644
--- a/grade/report/grader/templates/cell.mustache
+++ b/grade/report/grader/templates/cell.mustache
@@ -41,22 +41,12 @@
                     {{>core_grades/grades/grader/scale}}
                 {{/scale}}
                 {{^scale}}
-                    <div class="container">
-                        <div class="row">
-                            {{>core_grades/grades/grader/input}}
-                        </div>
-                        {{#canapplypenalty}}
-                            <div class="row deductedmark">
-                                <input type="checkbox" name="{{exemptionname}}"
-                                       value="{{deductedmark}}" id="{{exemptionid}}" class="ms-0"
-                                       {{#penaltyexempted}}checked{{/penaltyexempted}}>
-                                <label for="{{exemptionid}}" class="form-check-label ml-1 accesshide" title="{{{exemptiontooltip}}}">
-                                    {{{exemptionarialabel}}}
-                                </label>
-                                <span class="form-check-label ml-1 ">{{{exemptionlabel}}}</span>
-                            </div>
-                        {{/canapplypenalty}}
-                    </div>
+                    {{#canapplypenalty}}
+                        {{>core_grades/grades/grader/overriden_with_penalty}}
+                    {{/canapplypenalty}}
+                    {{^canapplypenalty}}
+                        {{>core_grades/grades/grader/input}}
+                    {{/canapplypenalty}}
                 {{/scale}}
             {{/iseditable}}
             {{^iseditable}}
diff --git a/grade/report/grader/tests/behat/grade_override_with_deduction.feature b/grade/report/grader/tests/behat/grade_override_with_deduction.feature
index 034d6330a89da..6c1a51a9443f7 100644
--- a/grade/report/grader/tests/behat/grade_override_with_deduction.feature
+++ b/grade/report/grader/tests/behat/grade_override_with_deduction.feature
@@ -26,7 +26,7 @@ Feature: As a teacher, I want to override a grade with a deduction and check the
 
   @javascript
   Scenario: Override a grade with a deduction and check the gradebook
-    And I am on "Course 1" course homepage
+    Given I am on "Course 1" course homepage
     And I navigate to "View > Grader report" in the course gradebook
     And the following should exist in the "user-grades" table:
       | -1-                | -2-                  | -3-       | -4-       | -5-       |
@@ -37,16 +37,16 @@ Feature: As a teacher, I want to override a grade with a deduction and check the
         | Student 1 Manual grade 01 Penalty exemption | 0  |
         | Student 1 Manual grade 02 Penalty exemption | 1  |
     And I click on "Save changes" "button"
-    And I turn editing mode off
-    And the following should exist in the "user-grades" table:
+    When I turn editing mode off
+    Then the following should exist in the "user-grades" table:
       | -1-                | -2-                  | -3-       | -4-       | -5-       |
       | Student 1          | student1@example.com | 70        | 80        | 150       |
-    And I turn editing mode on
+    When I turn editing mode on
     And I set the following fields to these values:
       | Student 1 Manual grade 02 grade             | 100 |
       | Student 1 Manual grade 02 Penalty exemption | 1   |
     And I click on "Save changes" "button"
     And I turn editing mode off
-    And the following should exist in the "user-grades" table:
+    Then the following should exist in the "user-grades" table:
       | -1-                | -2-                  | -3-       | -4-       | -5-       |
       | Student 1          | student1@example.com | 70        | 100       | 170       |
diff --git a/grade/templates/grades/grader/overriden_with_penalty.mustache b/grade/templates/grades/grader/overriden_with_penalty.mustache
new file mode 100644
index 0000000000000..14c3ebdd121d7
--- /dev/null
+++ b/grade/templates/grades/grader/overriden_with_penalty.mustache
@@ -0,0 +1,49 @@
+{{!
+    This file is part of Moodle - http://moodle.org/
+
+    Moodle is free software: you can redistribute it and/or modify
+    it under the terms of the GNU General Public License as published by
+    the Free Software Foundation, either version 3 of the License, or
+    (at your option) any later version.
+
+    Moodle is distributed in the hope that it will be useful,
+    but WITHOUT ANY WARRANTY; without even the implied warranty of
+    MERCHANTABILITY or FITNESS FOR A PARTICULAR PURPOSE.  See the
+    GNU General Public License for more details.
+
+    You should have received a copy of the GNU General Public License
+    along with Moodle.  If not, see <http://www.gnu.org/licenses/>.
+}}
+{{!
+    @template core_grades/grades/grader/overriden_with_penalty
+
+    Input template for grader report cell.
+
+    Example context (json):
+    {
+        "deductedmark": "30.00",
+        "exemptionid": "exemption3_2",
+        "exemptionlabel": "Exempt penalty",
+        "exemptionname": "exemption[3][2]",
+        "penaltyexempted": true,
+    }
+}}
+
+<div class="container">
+    <div class="row">
+        <div class="mr-0">Original grade: </div>
+        {{>core_grades/grades/grader/input}}
+    </div>
+
+    <div class="row">
+        <div class="mr-0">Current grade: {{{effectivegrade}}}</div>
+    </div>
+
+    <div class="row">
+        <div class="mr-0" title="{{exemptiontooltip}}">Exempt penalty:</div>
+        <label for="{{exemptionid}}" class="accesshide">{{{exemptionlabel}}}</label>
+        <input type="checkbox" name="{{exemptionname}}"
+               value="{{deductedmark}}" id="{{exemptionid}}"
+               {{#penaltyexempted}}checked{{/penaltyexempted}}>
+    </div>
+</div>