diff --git a/CHANGELOG.md b/CHANGELOG.md
index f1dcb234..3beb92ae 100644
--- a/CHANGELOG.md
+++ b/CHANGELOG.md
@@ -7,6 +7,8 @@ and this project adheres to [Semantic Versioning](https://semver.org/).
 
 ## [Unreleased]
 
+- fix [#374](https://github.com/JLLeitschuh/ktlint-gradle/issues/374): fix pre-commit hook path handling for projects in subdirectories [#996](https://github.com/JLLeitschuh/ktlint-gradle/pull/996)
+
 ## [14.0.1] - 2025-11-10
 
 - Update build to work with gradle 9.1 and Java 25 [#962](https://github.com/JLLeitschuh/ktlint-gradle/pull/962)
diff --git a/plugin/src/main/kotlin/org/jlleitschuh/gradle/ktlint/GitHook.kt b/plugin/src/main/kotlin/org/jlleitschuh/gradle/ktlint/GitHook.kt
index 4b4368b1..d10fb48f 100644
--- a/plugin/src/main/kotlin/org/jlleitschuh/gradle/ktlint/GitHook.kt
+++ b/plugin/src/main/kotlin/org/jlleitschuh/gradle/ktlint/GitHook.kt
@@ -44,16 +44,18 @@ private fun generateGitCommand(
 ): String = if (gradleRootDirPrefix.isEmpty()) {
     "git --no-pager diff --name-status --no-color --cached"
 } else {
-    "git --no-pager diff --name-status --no-color --cached -- $gradleRootDirPrefix/"
+    "git --no-pager diff --name-status --no-color --cached --relative=$gradleRootDirPrefix -- $gradleRootDirPrefix/"
 }
 
 private fun postCheck(
-    shouldUpdateCommit: Boolean
+    shouldUpdateCommit: Boolean,
+    gradleRootDirPrefix: String
 ): String = if (shouldUpdateCommit) {
+    val filePrefix = if (gradleRootDirPrefix.isNotEmpty()) "$gradleRootDirPrefix/" else ""
     """
     echo "${'$'}CHANGED_FILES" | while read -r file; do
-        if [ -f ${'$'}file ]; then
-            git add ${'$'}file
+        if [ -f $filePrefix${'$'}file ]; then
+            git add $filePrefix${'$'}file
         fi
     done
     """
@@ -91,7 +93,7 @@ internal fun generateGitHook(
     gradle_command_exit_code=${'$'}?
 
     echo "Completed ktlint run."
-    ${postCheck(shouldUpdateCommit)}
+    ${postCheck(shouldUpdateCommit, gradleRootDirPrefix)}
 
     if [ -s ${'$'}diff ]; then
       git apply --ignore-whitespace ${'$'}diff
@@ -188,7 +190,7 @@ open class KtlintInstallGitHookTask @Inject constructor(
             gitHookFile.createNewFile()
             gitHookFile.setExecutable(true)
         }
-        val gradleRootDirPrefix = File(rootDirectory.get()).relativeTo(repo.workTree).path
+        val gradleRootDirPrefix = File(rootDirectory.get()).relativeTo(repo.workTree).path.replace(File.separator, "/")
 
         if (gitHookFile.length() == 0L) {
             gitHookFile.writeText(
diff --git a/plugin/src/test/kotlin/org/jlleitschuh/gradle/ktlint/GitHookTasksTest.kt b/plugin/src/test/kotlin/org/jlleitschuh/gradle/ktlint/GitHookTasksTest.kt
index dd158274..98c79f85 100644
--- a/plugin/src/test/kotlin/org/jlleitschuh/gradle/ktlint/GitHookTasksTest.kt
+++ b/plugin/src/test/kotlin/org/jlleitschuh/gradle/ktlint/GitHookTasksTest.kt
@@ -153,6 +153,75 @@ class GitHookTasksTest : AbstractPluginTest() {
         }
     }
 
+    @DisplayName("Check hook should use --relative flag when Gradle project is in subdirectory")
+    @CommonTest
+    fun checkHookUsesRelativeFlagInSubdirectory(gradleVersion: GradleVersion) {
+        val gradleRoot = projectRoot.resolve("project/submodule/").also { it.mkdirs() }
+        val gitDir = projectRoot.initGit()
+
+        project(gradleVersion, projectPath = gradleRoot) {
+            build(":$INSTALL_GIT_HOOK_CHECK_TASK") {
+                assertThat(task(":$INSTALL_GIT_HOOK_CHECK_TASK")?.outcome).isEqualTo(TaskOutcome.SUCCESS)
+                val hookText = gitDir.preCommitGitHook().readText()
+                assertThat(hookText).contains("--relative=project/submodule")
+                assertThat(hookText).contains("-- project/submodule/")
+            }
+        }
+    }
+
+    @DisplayName("Format hook should use --relative flag and correct file paths when Gradle project is in subdirectory")
+    @CommonTest
+    fun formatHookUsesRelativeFlagInSubdirectory(gradleVersion: GradleVersion) {
+        val gradleRoot = projectRoot.resolve("project/submodule/").also { it.mkdirs() }
+        val gitDir = projectRoot.initGit()
+
+        project(gradleVersion, projectPath = gradleRoot) {
+            build(":$INSTALL_GIT_HOOK_FORMAT_TASK") {
+                assertThat(task(":$INSTALL_GIT_HOOK_FORMAT_TASK")?.outcome).isEqualTo(TaskOutcome.SUCCESS)
+                val hookText = gitDir.preCommitGitHook().readText()
+                // Should use --relative flag for git diff
+                assertThat(hookText).contains("--relative=project/submodule")
+                assertThat(hookText).contains("-- project/submodule/")
+                // Should prefix file paths in git add command
+                assertThat(hookText).contains("if [ -f project/submodule/\$file ]; then")
+                assertThat(hookText).contains("git add project/submodule/\$file")
+            }
+        }
+    }
+
+    @DisplayName("Check hook should not use --relative flag when Gradle project is at git root")
+    @CommonTest
+    fun checkHookDoesNotUseRelativeFlagAtGitRoot(gradleVersion: GradleVersion) {
+        project(gradleVersion) {
+            val gitDir = projectPath.initGit()
+
+            build(":$INSTALL_GIT_HOOK_CHECK_TASK") {
+                assertThat(task(":$INSTALL_GIT_HOOK_CHECK_TASK")?.outcome).isEqualTo(TaskOutcome.SUCCESS)
+                val hookText = gitDir.preCommitGitHook().readText()
+                // Should NOT use --relative flag when at git root
+                assertThat(hookText).doesNotContain("--relative=")
+            }
+        }
+    }
+
+    @DisplayName("Format hook should not use --relative flag when Gradle project is at git root")
+    @CommonTest
+    fun formatHookDoesNotUseRelativeFlagAtGitRoot(gradleVersion: GradleVersion) {
+        project(gradleVersion) {
+            val gitDir = projectPath.initGit()
+
+            build(":$INSTALL_GIT_HOOK_FORMAT_TASK") {
+                assertThat(task(":$INSTALL_GIT_HOOK_FORMAT_TASK")?.outcome).isEqualTo(TaskOutcome.SUCCESS)
+                val hookText = gitDir.preCommitGitHook().readText()
+                // Should NOT use --relative flag when at git root
+                assertThat(hookText).doesNotContain("--relative=")
+                // Should NOT prefix file paths
+                assertThat(hookText).contains("if [ -f \$file ]; then")
+                assertThat(hookText).doesNotContain("if [ -f /\$file ]; then")
+            }
+        }
+    }
+
     @DisplayName("Check hook should not include files into git commit")
     @CommonTest
     fun checkHookShouldNotIncludeFilesIntoGitCommit(gradleVersion: GradleVersion) {