diff --git a/cabal-gild.cabal b/cabal-gild.cabal
--- a/cabal-gild.cabal
+++ b/cabal-gild.cabal
@@ -11,7 +11,7 @@
 maintainer: Taylor Fausak
 name: cabal-gild
 synopsis: Formats package descriptions.
-version: 1.3.1.0
+version: 1.3.1.1
 
 source-repository head
   type: git
diff --git a/source/library/CabalGild/Unstable/Action/EvaluatePragmas.hs b/source/library/CabalGild/Unstable/Action/EvaluatePragmas.hs
--- a/source/library/CabalGild/Unstable/Action/EvaluatePragmas.hs
+++ b/source/library/CabalGild/Unstable/Action/EvaluatePragmas.hs
@@ -78,7 +78,8 @@
       position =
         maybe (fst $ Name.annotation n) (fst . FieldLine.annotation) $
           Maybe.listToMaybe fls
-      excludedFiles = Set.fromList $ fmap normalize strs
+      -- Exclusion must be computed relative to the directory containing the cabal file (see #71)
+      excludedFiles = Set.fromList $ fmap (normalize . FilePath.combine root) strs
       fieldLines =
         zipWith ModuleName.toFieldLine ((,) position <$> comments : repeat [])
           . Maybe.mapMaybe (toModuleName directories)
diff --git a/source/test-suite/Main.hs b/source/test-suite/Main.hs
--- a/source/test-suite/Main.hs
+++ b/source/test-suite/Main.hs
@@ -1114,6 +1114,17 @@
       "library\n -- cabal-gild: discover --exclude N.hs\n exposed-modules:"
       "library\n  -- cabal-gild: discover --exclude N.hs\n  exposed-modules: M\n"
 
+  Hspec.it "treats excluded paths relative to cabal file" $ do
+    let d = "input"
+        (a, s, w) =
+          runGild
+            ["--input", FilePath.combine d "io.cabal"]
+            [(Input.File $ FilePath.combine d "io.cabal", String.toUtf8 "library\n -- cabal-gild: discover src --exclude src/N.hs\n exposed-modules:")]
+            [(FilePath.combine d "src", ["M.hs", "N.hs"])]
+    a `Hspec.shouldSatisfy` Either.isRight
+    w `Hspec.shouldBe` []
+    s `Hspec.shouldBe` Map.singleton Output.Stdout (String.toUtf8 "library\n  -- cabal-gild: discover src --exclude src/N.hs\n  exposed-modules: M\n")
+
   Hspec.it "fails when discovering with an unknown option" $ do
     let (a, s, w) =
           runGild