diff --git a/internal/transport/http2_server.go b/internal/transport/http2_server.go
index 7e53eb1735ef..64e47dd3ac1a 100644
--- a/internal/transport/http2_server.go
+++ b/internal/transport/http2_server.go
@@ -1340,10 +1340,10 @@ func (t *http2Server) closeStream(s *ServerStream, rst bool, rstCode http2.ErrCo
 	// called to interrupt the potential blocking on other goroutines.
 	s.cancel()
 
-	oldState := s.swapState(streamDone)
-	if oldState == streamDone {
-		return
-	}
+	// We can't return early even if the stream's state is "done" as the state
+	// might have been set by the `finishStream` method. Deleting the stream via
+	// `finishStream` can get blocked on flow control.
+	s.swapState(streamDone)
 	t.deleteStream(s, eosReceived)
 
 	t.controlBuf.put(&cleanupStream{
diff --git a/test/transport_test.go b/test/transport_test.go
index 10e9ab57de30..cc591c7c7037 100644
--- a/test/transport_test.go
+++ b/test/transport_test.go
@@ -229,3 +229,76 @@ func (s) TestRSTDuringMessageRead(t *testing.T) {
 		t.Fatalf("client.EmptyCall() returned %v; want status with code %v", err, codes.Canceled)
 	}
 }
+
+// Test verifies that a client-side cancellation correctly frees up resources on
+// the server. The test setup is designed to simulate a scenario where a server
+// is blocked from sending a large message due to a full client-side flow
+// control window. The client-side cancellation of this blocked RPC then frees
+// up the max concurrent streams quota on the server, allowing a new RPC to be
+// created successfully.
+func (s) TestCancelWhileServerWaitingForFlowControl(t *testing.T) {
+	serverDoneCh := make(chan struct{}, 2)
+	const flowControlWindowSize = 65535
+	ss := &stubserver.StubServer{
+		StreamingOutputCallF: func(_ *testpb.StreamingOutputCallRequest, stream testpb.TestService_StreamingOutputCallServer) error {
+			// Send a large message to exhaust the client's flow control window.
+			stream.Send(&testpb.StreamingOutputCallResponse{
+				Payload: &testpb.Payload{
+					Body: make([]byte, flowControlWindowSize+1),
+				},
+			})
+			serverDoneCh <- struct{}{}
+			return nil
+		},
+	}
+
+	// Create a server that allows only 1 stream at a time.
+	ss = stubserver.StartTestService(t, ss, grpc.MaxConcurrentStreams(1))
+	defer ss.Stop()
+	// Use a static flow control window.
+	if err := ss.StartClient(grpc.WithInitialWindowSize(flowControlWindowSize)); err != nil {
+		t.Fatalf("Error while start test service client: %v", err)
+	}
+	client := ss.Client
+	ctx, cancel := context.WithTimeout(context.Background(), defaultTestTimeout)
+	defer cancel()
+
+	streamCtx, streamCancel := context.WithCancel(ctx)
+	defer streamCancel()
+
+	if _, err := client.StreamingOutputCall(streamCtx, &testpb.StreamingOutputCallRequest{}); err != nil {
+		t.Fatalf("Failed to create server streaming RPC: %v", err)
+	}
+
+	// Wait for the server handler to return. This should cause the trailers to
+	// be buffered on the server, waiting for flow control quota to first send
+	// the data frame.
+	select {
+	case <-ctx.Done():
+		t.Fatal("Context timed out waiting for server handler to return.")
+	case <-serverDoneCh:
+	}
+
+	// Attempt to create a stream. It should fail since the previous stream is
+	// still blocked.
+	shortCtx, shortCancel := context.WithTimeout(ctx, defaultTestShortTimeout)
+	defer shortCancel()
+	_, err := client.StreamingOutputCall(shortCtx, &testpb.StreamingOutputCallRequest{})
+	if status.Code(err) != codes.DeadlineExceeded {
+		t.Fatalf("Server stream creation returned error with unexpected status code: %v, want code: %v", err, codes.DeadlineExceeded)
+	}
+
+	// Cancel the RPC, this should free up concurrent stream quota on the
+	// server.
+	streamCancel()
+
+	// Attempt to create another stream.
+	stream, err := client.StreamingOutputCall(ctx, &testpb.StreamingOutputCallRequest{})
+	if err != nil {
+		t.Fatalf("Failed to create server streaming RPC: %v", err)
+	}
+	_, err = stream.Recv()
+	if err != nil {
+		t.Fatalf("Failed to read from the stream: %v", err)
+	}
+}