diff --git a/.devcontainer/devcontainer.json b/.devcontainer/devcontainer.json
index 52232951..acc2ca7d 100644
--- a/.devcontainer/devcontainer.json
+++ b/.devcontainer/devcontainer.json
@@ -35,11 +35,16 @@
                     "--profile",
                     "black",
                     "--filter-files"
-                ]
+                ],
+                "python.testing.pytestArgs": [
+                    "tests"
+                ],
+                "python.testing.unittestEnabled": false,
+                "python.testing.pytestEnabled": true
             }
         }
     },
-    "postCreateCommand": "scripts/dev_setup.sh",
+    "postCreateCommand": "scripts/dev_setup.sh --devcontainer",
     "features": {
         "ghcr.io/devcontainers-contrib/features/black:2": {},
         "ghcr.io/devcontainers-contrib/features/mypy:2": {},
diff --git a/scripts/dev_setup.sh b/scripts/dev_setup.sh
index 24be672d..3de55d1d 100755
--- a/scripts/dev_setup.sh
+++ b/scripts/dev_setup.sh
@@ -2,14 +2,18 @@
 # ---
 PROJECT_ROOT=$(git rev-parse --show-toplevel)
 
-# Default to minimal installation unless --full flag passed
+# Default is a minimal, local installation unless config flags are set.
 INSTALL_FULL=false
+DEVCONTAINER=false
 for arg in "$@"
 do
     if [ "$arg" == "--full" ]
     then
         INSTALL_FULL=true
-        break
+    fi
+    if [ "$arg" == "--devcontainer" ]
+    then
+        DEVCONTAINER=true
     fi
 done
 
@@ -42,6 +46,74 @@ if [ "$INSTALL_FULL" = true ] ; then
     yarn install
 fi
 
+# Create .vscode/launch.json if it doesn't exist
+# ---
+VSCODE_DIR="$PROJECT_ROOT/.vscode"
+LAUNCH_JSON_PATH="$VSCODE_DIR/launch.json"
+
+# Overwrite project vscode launch.json in devcontainer
+# ---
+# Differs from default launch.json with sudo true.
+# Required by pgserver in github codespaces, not in local dev.
+mkdir -p "$VSCODE_DIR"
+if [ "$DEVCONTAINER" = true ]; then
+  echo "Creating $LAUNCH_JSON_PATH..."
+  cat << EOF > "$LAUNCH_JSON_PATH"
+{
+    "version": "0.2.0",
+    "configurations": [
+        {
+            "name": "Launch Khoj",
+            "type": "debugpy",
+            "request": "launch",
+            "module": "src.khoj.main",
+            "justMyCode": false,
+            "console": "integratedTerminal",
+            "sudo": true,
+            "args": [
+                "-v",
+                "--anonymous-mode",
+                "--non-interactive",
+                "--port=42110",
+            ],
+            // You can load environment variables via a .env file, the env field below or Github Codespace secrets.
+            "envFile": "\${workspaceFolder}/.env",
+            "env": {
+                "KHOJ_ADMIN_EMAIL": "admin",
+                "KHOJ_ADMIN_PASSWORD": "admin",
+                "USE_EMBEDDED_DB": "True",
+                "KHOJ_DEBUG": "True",
+                "KHOJ_TELEMETRY_DISABLE": "True",
+                // Set LLM Provider API keys
+                // ---
+                // "GEMINI_API_KEY": "",
+                // "ANTHROPIC_API_KEY": "",
+                // "OPENAI_API_KEY": "",
+                // "OPENAI_BASE_URL": "http://localhost:11434/v1/",
+                // "KHOJ_DEFAULT_CHAT_MODEL": "claude-sonnet-4-0",
+                // Set Search Provider API keys
+                // ---
+                // "SERPER_DEV_API_KEY": "",
+                // "OLOSTEP_API_KEY": "",
+                // "FIRECRAWL_API_KEY": "",
+                // "JINA_API_KEY": "",
+                // Enable Khoj Operator
+                // ---
+                // "KHOJ_OPERATOR_ENABLED": "True",
+                // Configure Code Sandbox
+                // ---
+                // "KHOJ_TERRARIUM_URL": "http://localhost:8080",
+                // "E2B_API_KEY": "",
+                // Enable Promptracer to debug prompt flows
+                // ---
+                // "PROMPTRACE_DIR": "\${workspaceFolder}/promptrace",
+            }
+        },
+    ]
+}
+EOF
+fi
+
 # Install pre-commit hooks
 # ----
 echo "Installing pre-commit hooks..."