diff --git a/packages/subgraph-service/test/shared/HorizonStakingShared.t.sol b/packages/subgraph-service/test/shared/HorizonStakingShared.t.sol
index abe425793..66915d043 100644
--- a/packages/subgraph-service/test/shared/HorizonStakingShared.t.sol
+++ b/packages/subgraph-service/test/shared/HorizonStakingShared.t.sol
@@ -33,6 +33,10 @@ abstract contract HorizonStakingSharedTest is SubgraphBaseTest {
         staking.delegate(_indexer, _verifier, _tokens, _minSharesOut);
     }
 
+    function _undelegate(address _indexer, address _verifier, uint256 _shares) internal {
+        staking.undelegate(_indexer, _verifier, _shares);
+    }
+
     function _setDelegationFeeCut(
         address _indexer,
         address _verifier,
diff --git a/packages/subgraph-service/test/subgraphService/allocation/overDelegated.t.sol b/packages/subgraph-service/test/subgraphService/allocation/overDelegated.t.sol
new file mode 100644
index 000000000..c9e58355b
--- /dev/null
+++ b/packages/subgraph-service/test/subgraphService/allocation/overDelegated.t.sol
@@ -0,0 +1,59 @@
+// SPDX-License-Identifier: MIT
+pragma solidity 0.8.27;
+
+import "forge-std/Test.sol";
+
+import { IGraphPayments } from "@graphprotocol/horizon/contracts/interfaces/IGraphPayments.sol";
+import { IHorizonStakingTypes } from "@graphprotocol/horizon/contracts/interfaces/internal/IHorizonStakingTypes.sol";
+
+import { Allocation } from "../../../contracts/libraries/Allocation.sol";
+import { ISubgraphService } from "../../../contracts/interfaces/ISubgraphService.sol";
+import { SubgraphServiceTest } from "../SubgraphService.t.sol";
+
+contract SubgraphServiceAllocationOverDelegatedTest is SubgraphServiceTest {
+
+    /*
+     * TESTS
+     */
+
+    function test_SubgraphService_Allocation_OverDelegated_NotOverAllocatedAfterUndelegation(
+        uint256 delegationTokens,
+        uint256 undelegationTokens
+    ) public useIndexer {
+        // Use minimum provision tokens
+        uint256 indexerTokens = minimumProvisionTokens;
+        uint256 allocationTokens = indexerTokens * delegationRatio;
+        // Bound delegation tokens to be over delegated
+        delegationTokens = bound(delegationTokens, allocationTokens, MAX_TOKENS);
+        // Assume undelegation tokens to still leave indexer over delegated
+        vm.assume(undelegationTokens > 1);
+        vm.assume(undelegationTokens < delegationTokens - allocationTokens);
+
+        // Create provision
+        token.approve(address(staking), indexerTokens);
+        _createProvision(users.indexer, indexerTokens, maxSlashingPercentage, disputePeriod);
+        _register(users.indexer, abi.encode("url", "geoHash", address(0)));
+
+        // Delegate so that indexer is over allocated
+        resetPrank(users.delegator);
+        token.approve(address(staking), delegationTokens);
+        _delegate(users.indexer, address(subgraphService), delegationTokens, 0);
+
+        // Create allocation
+        resetPrank(users.indexer);
+        bytes memory data = _createSubgraphAllocationData(
+            users.indexer,
+            subgraphDeployment,
+            allocationIDPrivateKey,
+            allocationTokens
+        );
+        _startService(users.indexer, data);
+
+        // Undelegate
+        resetPrank(users.delegator);
+        _undelegate(users.indexer, address(subgraphService), undelegationTokens);
+
+        // Check that indexer is not over allocated
+        assertFalse(subgraphService.isOverAllocated(users.indexer));
+    }
+}