diff --git a/src/languageservice/services/yamlSchemaService.ts b/src/languageservice/services/yamlSchemaService.ts
index 872b512da..04a7aec8d 100644
--- a/src/languageservice/services/yamlSchemaService.ts
+++ b/src/languageservice/services/yamlSchemaService.ts
@@ -328,12 +328,24 @@ export class YAMLSchemaService extends JSONSchemaService {
       let schemaFromModeline = getSchemaFromModeline(doc);
       if (schemaFromModeline !== undefined) {
         if (!schemaFromModeline.startsWith('file:') && !schemaFromModeline.startsWith('http')) {
+          // If path contains a fragment and it is left intact, "#" will be
+          // considered part of the filename and converted to "%23" by
+          // path.resolve() -> take it out and add back after path.resolve
+          let appendix = '';
+          if (schemaFromModeline.indexOf('#') > 0) {
+            const segments = schemaFromModeline.split('#', 2);
+            schemaFromModeline = segments[0];
+            appendix = segments[1];
+          }
           if (!path.isAbsolute(schemaFromModeline)) {
             const resUri = URI.parse(resource);
             schemaFromModeline = URI.file(path.resolve(path.parse(resUri.fsPath).dir, schemaFromModeline)).toString();
           } else {
             schemaFromModeline = URI.file(schemaFromModeline).toString();
           }
+          if (appendix.length > 0) {
+            schemaFromModeline += '#' + appendix;
+          }
         }
         this.addSchemaPriority(schemaFromModeline, SchemaPriority.Modeline);
         schemas.push(schemaFromModeline);
diff --git a/test/yamlSchemaService.test.ts b/test/yamlSchemaService.test.ts
index f76b03369..8563adc72 100644
--- a/test/yamlSchemaService.test.ts
+++ b/test/yamlSchemaService.test.ts
@@ -92,6 +92,31 @@ describe('YAML Schema Service', () => {
       expect(schema.schema.definitions.bar.type).eqls('string');
     });
 
+    it('should handle file path with fragments', async () => {
+      const content = `# yaml-language-server: $schema=schema.json#/definitions/schemaArray\nfoo: bar`;
+      const yamlDock = parse(content);
+
+      requestServiceMock = sandbox.fake.resolves(`{"definitions": {"schemaArray": {
+        "type": "array",
+        "minItems": 1,
+        "items": { "$ref": "#" }
+    }}, "properties": {}}`);
+
+      const service = new SchemaService.YAMLSchemaService(requestServiceMock);
+      const schema = await service.getSchemaForResource('', yamlDock.documents[0]);
+
+      expect(requestServiceMock).calledTwice;
+      if (process.platform === 'win32') {
+        expect(requestServiceMock).calledWithExactly('file:///d%3A/schema.json');
+        expect(requestServiceMock).calledWithExactly('file:///d%3A/schema.json#/definitions/schemaArray');
+      } else {
+        expect(requestServiceMock).calledWithExactly('file:///schema.json');
+        expect(requestServiceMock).calledWithExactly('file:///schema.json#/definitions/schemaArray');
+      }
+
+      expect(schema.schema.type).eqls('array');
+    });
+
     it('should handle modeline schema comment in the middle of file', () => {
       const documentContent = `foo:\n  bar\n# yaml-language-server: $schema=https://json-schema.org/draft-07/schema#\naa:bbb\n`;
       const content = `${documentContent}`;