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Here's how to update your settings (from here):

Option 1:

• Open the Settings editor:

  • On Windows/Linux - File > Preferences > Settings

  • On macOS - Code > Preferences > Settings

  • or use the keyboard shortcut (Ctrl+,).

• Check the following box:

  • Extensions > Python > Terminal: Execute In File Dir.

or use the Search bar and type this setting id python.terminal.executeInFileDir.

Option 2:

• Locate and open the user settings file:

  • Windows %APPDATA%\Code\User\settings.json

  • macOS $HOME/Library/Application Support/Code/User/settings.json

  • Linux $HOME/.config/Code/User/settings.json

• Add this line: "python.terminal.executeInFileDir": true