diff --git a/lib/java/com/google/android/material/bottomnavigation/BottomNavigationMenuView.java b/lib/java/com/google/android/material/bottomnavigation/BottomNavigationMenuView.java
index 1c3c28e2612..c9f986d74b9 100644
--- a/lib/java/com/google/android/material/bottomnavigation/BottomNavigationMenuView.java
+++ b/lib/java/com/google/android/material/bottomnavigation/BottomNavigationMenuView.java
@@ -77,7 +77,7 @@ protected void onMeasure(int widthMeasureSpec, int heightMeasureSpec) {
     tempChildWidths.clear();
 
     int parentHeight = MeasureSpec.getSize(heightMeasureSpec);
-    final int heightSpec = MeasureSpec.makeMeasureSpec(parentHeight, MeasureSpec.EXACTLY);
+    final int heightSpec = MeasureSpec.makeMeasureSpec(parentHeight, MeasureSpec.AT_MOST);
 
     if (isShifting(getLabelVisibilityMode(), visibleCount)
         && isItemHorizontalTranslationEnabled()) {
@@ -131,6 +131,7 @@ && isItemHorizontalTranslationEnabled()) {
     }
 
     int totalWidth = 0;
+    int maxHeight = 0;
     for (int i = 0; i < totalCount; i++) {
       final View child = getChildAt(i);
       if (child.getVisibility() == GONE) {
@@ -141,9 +142,10 @@ && isItemHorizontalTranslationEnabled()) {
       ViewGroup.LayoutParams params = child.getLayoutParams();
       params.width = child.getMeasuredWidth();
       totalWidth += child.getMeasuredWidth();
+      maxHeight = Math.max(maxHeight, child.getMeasuredHeight());
     }
 
-    setMeasuredDimension(totalWidth, parentHeight);
+    setMeasuredDimension(totalWidth, Math.max(maxHeight, getSuggestedMinimumHeight()));
   }
 
   @Override
diff --git a/lib/java/com/google/android/material/bottomnavigation/BottomNavigationView.java b/lib/java/com/google/android/material/bottomnavigation/BottomNavigationView.java
index 61ba2e3c9cd..b11e4db5d22 100644
--- a/lib/java/com/google/android/material/bottomnavigation/BottomNavigationView.java
+++ b/lib/java/com/google/android/material/bottomnavigation/BottomNavigationView.java
@@ -19,7 +19,6 @@
 import com.google.android.material.R;
 
 import static androidx.annotation.RestrictTo.Scope.LIBRARY_GROUP;
-import static java.lang.Math.min;
 
 import android.content.Context;
 import android.os.Build.VERSION;
@@ -168,6 +167,13 @@ public WindowInsetsCompat onApplyWindowInsets(
   protected void onMeasure(int widthMeasureSpec, int heightMeasureSpec) {
     int minHeightSpec = makeMinHeightSpec(heightMeasureSpec);
     super.onMeasure(widthMeasureSpec, minHeightSpec);
+    if (MeasureSpec.getMode(heightMeasureSpec) != MeasureSpec.EXACTLY) {
+      setMeasuredDimension(
+          getMeasuredWidth(),
+          Math.max(
+              getMeasuredHeight(),
+              getSuggestedMinimumHeight() + getPaddingTop() + getPaddingBottom()));
+    }
   }
 
   private int makeMinHeightSpec(int measureSpec) {
@@ -176,7 +182,7 @@ private int makeMinHeightSpec(int measureSpec) {
       minHeight += getPaddingTop() + getPaddingBottom();
 
       return MeasureSpec.makeMeasureSpec(
-          min(MeasureSpec.getSize(measureSpec), minHeight), MeasureSpec.EXACTLY);
+          Math.max(MeasureSpec.getSize(measureSpec), minHeight), MeasureSpec.AT_MOST);
     }
 
     return measureSpec;
diff --git a/lib/java/com/google/android/material/bottomnavigation/res/layout/design_bottom_navigation_item.xml b/lib/java/com/google/android/material/bottomnavigation/res/layout/design_bottom_navigation_item.xml
index d64dd8d7876..591415f6685 100644
--- a/lib/java/com/google/android/material/bottomnavigation/res/layout/design_bottom_navigation_item.xml
+++ b/lib/java/com/google/android/material/bottomnavigation/res/layout/design_bottom_navigation_item.xml
@@ -15,53 +15,65 @@
   ~ limitations under the License.
   -->
 <merge xmlns:android="http://schemas.android.com/apk/res/android">
-
-  <FrameLayout
-    android:id="@id/navigation_bar_item_icon_container"
+  <LinearLayout
+    android:id="@id/navigation_bar_item_content_container"
     android:layout_width="wrap_content"
     android:layout_height="wrap_content"
-    android:layout_gravity="center_horizontal"
+    android:layout_gravity="top|center_horizontal"
+    android:clipChildren="false"
+    android:duplicateParentState="true"
+    android:gravity="center"
     android:layout_marginTop="@dimen/design_bottom_navigation_margin"
-    android:layout_marginBottom="@dimen/design_bottom_navigation_margin"
-    android:duplicateParentState="true">
-    <View
-      android:id="@id/navigation_bar_item_active_indicator_view"
-      android:layout_width="0dp"
-      android:layout_height="0dp"
-      android:layout_gravity="center" />
-    <ImageView
-      android:id="@id/navigation_bar_item_icon_view"
-      android:layout_width="24dp"
-      android:layout_height="24dp"
+    android:orientation="vertical">
+    <FrameLayout
+      android:id="@id/navigation_bar_item_icon_container"
+      android:layout_width="wrap_content"
+      android:layout_height="wrap_content"
       android:layout_gravity="center"
-      android:contentDescription="@null"
-      android:duplicateParentState="true"/>
-  </FrameLayout>
-  <com.google.android.material.internal.BaselineLayout
+      android:duplicateParentState="true">
+      <View
+        android:id="@id/navigation_bar_item_active_indicator_view"
+        android:layout_width="0dp"
+        android:layout_height="0dp"
+        android:layout_gravity="center" />
+      <ImageView
+        android:id="@id/navigation_bar_item_icon_view"
+        android:layout_width="@dimen/design_bottom_navigation_icon_size"
+        android:layout_height="@dimen/design_bottom_navigation_icon_size"
+        android:layout_gravity="center"
+        android:contentDescription="@null"
+        android:duplicateParentState="true" />
+    </FrameLayout>
+    <com.google.android.material.internal.BaselineLayout
       android:id="@id/navigation_bar_item_labels_group"
       android:layout_width="wrap_content"
       android:layout_height="wrap_content"
-      android:layout_gravity="bottom|center_horizontal"
-      android:paddingBottom="@dimen/design_bottom_navigation_label_padding"
+      android:paddingBottom="@dimen/m3_bottom_nav_item_padding_bottom"
       android:clipChildren="false"
       android:clipToPadding="false"
+      android:layout_gravity="center"
       android:duplicateParentState="true">
-    <TextView
+      <TextView
         android:id="@id/navigation_bar_item_small_label_view"
         android:layout_width="wrap_content"
         android:layout_height="wrap_content"
         android:duplicateParentState="true"
         android:ellipsize="end"
         android:maxLines="1"
-        android:textSize="@dimen/design_bottom_navigation_text_size"/>
-    <TextView
+        android:includeFontPadding="false"
+        android:gravity="center_vertical"
+        android:textSize="@dimen/design_bottom_navigation_text_size" />
+      <TextView
         android:id="@id/navigation_bar_item_large_label_view"
         android:layout_width="wrap_content"
         android:layout_height="wrap_content"
         android:duplicateParentState="true"
         android:ellipsize="end"
         android:maxLines="1"
+        android:gravity="center_vertical"
+        android:includeFontPadding="false"
         android:textSize="@dimen/design_bottom_navigation_active_text_size"
-        android:visibility="invisible"/>
-  </com.google.android.material.internal.BaselineLayout>
+        android:visibility="invisible" />
+    </com.google.android.material.internal.BaselineLayout>
+  </LinearLayout>
 </merge>
diff --git a/lib/java/com/google/android/material/bottomnavigation/res/values/styles.xml b/lib/java/com/google/android/material/bottomnavigation/res/values/styles.xml
index 887ccf46e96..bde27c71393 100644
--- a/lib/java/com/google/android/material/bottomnavigation/res/values/styles.xml
+++ b/lib/java/com/google/android/material/bottomnavigation/res/values/styles.xml
@@ -26,7 +26,8 @@
     <item name="itemIconSize">@dimen/design_bottom_navigation_icon_size</item>
     <item name="labelVisibilityMode">auto</item>
     <item name="itemPaddingTop">@dimen/design_bottom_navigation_margin</item>
-    <item name="itemPaddingBottom">@dimen/design_bottom_navigation_label_padding</item>
+    <item name="itemPaddingBottom">0dp</item>
+    <item name="activeIndicatorLabelPadding">1dp</item>
     <item name="itemActiveIndicatorStyle">@null</item>
     <item name="android:minHeight">@dimen/design_bottom_navigation_height</item>
   </style>
@@ -80,6 +81,7 @@
     <item name="android:minHeight">@dimen/m3_bottom_nav_min_height</item>
     <item name="materialThemeOverlay">@style/ThemeOverlay.Material3.BottomNavigationView</item>
     <item name="shapeAppearance">@style/ShapeAppearance.M3.Comp.NavigationBar.Container.Shape</item>
+    <item name="activeIndicatorLabelPadding">@dimen/m3_navigation_item_active_indicator_label_padding</item>
   </style>
 
   <style name="Widget.Material3.BottomNavigationView" parent="Base.Widget.Material3.BottomNavigationView">
diff --git a/lib/java/com/google/android/material/internal/BaselineLayout.java b/lib/java/com/google/android/material/internal/BaselineLayout.java
index cc7b29b3c73..5a40dc787cf 100644
--- a/lib/java/com/google/android/material/internal/BaselineLayout.java
+++ b/lib/java/com/google/android/material/internal/BaselineLayout.java
@@ -22,14 +22,18 @@
 import android.view.ViewGroup;
 
 /**
- * A simple ViewGroup that aligns all the views inside on a baseline. Note: bottom padding for this
- * view will be measured starting from the baseline.
+ * A simple ViewGroup that aligns all the views inside on a baseline.
+ *
+ * <p>If {@link BaselineLayout#measurePaddingFromBaseline} is true, bottom padding for this view
+ * will be measured starting from the baseline.
  *
  * @hide
  */
 public class BaselineLayout extends ViewGroup {
   private int baseline = -1;
 
+  private boolean measurePaddingFromBaseline;
+
   public BaselineLayout(Context context) {
     super(context, null, 0);
   }
@@ -42,6 +46,11 @@ public BaselineLayout(Context context, AttributeSet attrs, int defStyleAttr) {
     super(context, attrs, defStyleAttr);
   }
 
+  // TODO(b/338647654): We can remove this once navigation rail is updated to current specs
+  public void setMeasurePaddingFromBaseline(boolean measurePaddingFromBaseline) {
+    this.measurePaddingFromBaseline = measurePaddingFromBaseline;
+  }
+
   @Override
   protected void onMeasure(int widthMeasureSpec, int heightMeasureSpec) {
     final int count = getChildCount();
@@ -49,6 +58,7 @@ protected void onMeasure(int widthMeasureSpec, int heightMeasureSpec) {
     int maxHeight = 0;
     int maxChildBaseline = -1;
     int maxChildDescent = -1;
+    int maxMeasuredHeight = 0;
     int childState = 0;
 
     for (int i = 0; i < count; i++) {
@@ -58,6 +68,7 @@ protected void onMeasure(int widthMeasureSpec, int heightMeasureSpec) {
       }
 
       measureChild(child, widthMeasureSpec, heightMeasureSpec);
+      maxMeasuredHeight = Math.max(maxMeasuredHeight, child.getMeasuredHeight());
       final int baseline = child.getBaseline();
       if (baseline != -1) {
         maxChildBaseline = Math.max(maxChildBaseline, baseline);
@@ -68,11 +79,15 @@ protected void onMeasure(int widthMeasureSpec, int heightMeasureSpec) {
       childState = View.combineMeasuredStates(childState, child.getMeasuredState());
     }
     if (maxChildBaseline != -1) {
-      maxChildDescent = Math.max(maxChildDescent, getPaddingBottom());
-      maxHeight = Math.max(maxHeight, maxChildBaseline + maxChildDescent);
+      if (measurePaddingFromBaseline) {
+        maxChildDescent = Math.max(maxChildDescent, getPaddingBottom());
+        maxHeight = Math.max(maxHeight, maxChildBaseline + maxChildDescent);
+      }
       this.baseline = maxChildBaseline;
     }
-    maxHeight = Math.max(maxHeight, getSuggestedMinimumHeight());
+    maxHeight = Math.max(
+        measurePaddingFromBaseline ? maxHeight : maxMeasuredHeight + getPaddingBottom(),
+        getSuggestedMinimumHeight());
     maxWidth = Math.max(maxWidth, getSuggestedMinimumWidth());
     setMeasuredDimension(
         View.resolveSizeAndState(maxWidth, widthMeasureSpec, childState),
diff --git a/lib/java/com/google/android/material/navigation/NavigationBarItemView.java b/lib/java/com/google/android/material/navigation/NavigationBarItemView.java
index 012d18daf04..17230e43b2e 100644
--- a/lib/java/com/google/android/material/navigation/NavigationBarItemView.java
+++ b/lib/java/com/google/android/material/navigation/NavigationBarItemView.java
@@ -46,6 +46,7 @@
 import android.view.accessibility.AccessibilityNodeInfo;
 import android.widget.FrameLayout;
 import android.widget.ImageView;
+import android.widget.LinearLayout;
 import android.widget.TextView;
 import androidx.annotation.DimenRes;
 import androidx.annotation.DrawableRes;
@@ -67,6 +68,7 @@
 import com.google.android.material.animation.AnimationUtils;
 import com.google.android.material.badge.BadgeDrawable;
 import com.google.android.material.badge.BadgeUtils;
+import com.google.android.material.internal.BaselineLayout;
 import com.google.android.material.motion.MotionUtils;
 import com.google.android.material.resources.MaterialResources;
 import com.google.android.material.ripple.RippleUtils;
@@ -95,10 +97,11 @@ public abstract class NavigationBarItemView extends FrameLayout implements MenuV
   private int labelVisibilityMode;
   private boolean isShifting;
 
+  @NonNull private final LinearLayout contentContainer;
   @NonNull private final FrameLayout iconContainer;
   @NonNull private final View activeIndicatorView;
   private final ImageView icon;
-  private final ViewGroup labelGroup;
+  private final BaselineLayout labelGroup;
   private final TextView smallLabel;
   private final TextView largeLabel;
   private int itemPosition = INVALID_ITEM_POSITION;
@@ -137,6 +140,7 @@ public NavigationBarItemView(@NonNull Context context) {
 
     LayoutInflater.from(context).inflate(getItemLayoutResId(), this, true);
     iconContainer = findViewById(R.id.navigation_bar_item_icon_container);
+    contentContainer = findViewById(R.id.navigation_bar_item_content_container);
     activeIndicatorView = findViewById(R.id.navigation_bar_item_active_indicator_view);
     icon = findViewById(R.id.navigation_bar_item_icon_view);
     labelGroup = findViewById(R.id.navigation_bar_item_labels_group);
@@ -147,7 +151,7 @@ public NavigationBarItemView(@NonNull Context context) {
 
     itemPaddingTop = getResources().getDimensionPixelSize(getItemDefaultMarginResId());
     itemPaddingBottom = labelGroup.getPaddingBottom();
-    activeIndicatorLabelPadding = getResources().getDimensionPixelSize(R.dimen.m3_navigation_item_active_indicator_label_padding);
+    activeIndicatorLabelPadding = 0;
 
     // The labels used aren't always visible, so they are unreliable for accessibility. Instead,
     // the content description of the NavigationBarItemView should be used for accessibility.
@@ -181,7 +185,8 @@ public void onLayoutChange(
 
   @Override
   protected int getSuggestedMinimumWidth() {
-    LayoutParams labelGroupParams = (LayoutParams) labelGroup.getLayoutParams();
+    LinearLayout.LayoutParams labelGroupParams =
+        (LinearLayout.LayoutParams) labelGroup.getLayoutParams();
     int labelWidth =
         labelGroupParams.leftMargin + labelGroup.getMeasuredWidth() + labelGroupParams.rightMargin;
 
@@ -190,12 +195,10 @@ protected int getSuggestedMinimumWidth() {
 
   @Override
   protected int getSuggestedMinimumHeight() {
-    LayoutParams labelGroupParams = (LayoutParams) labelGroup.getLayoutParams();
-    return getSuggestedIconHeight()
-        + (labelGroup.getVisibility() == VISIBLE ? activeIndicatorLabelPadding : 0)
-        + labelGroupParams.topMargin
-        + labelGroup.getMeasuredHeight()
-        + labelGroupParams.bottomMargin;
+    LayoutParams contentContainerParams = (LayoutParams) contentContainer.getLayoutParams();
+    return contentContainer.getMeasuredHeight()
+        + contentContainerParams.topMargin
+        + contentContainerParams.bottomMargin;
   }
 
   @Override
@@ -395,31 +398,35 @@ public void setChecked(boolean checked) {
         if (isShifting) {
           if (checked) {
             // Show icon and large label
-            setViewTopMarginAndGravity(
-                iconContainer, itemPaddingTop, Gravity.CENTER_HORIZONTAL | Gravity.TOP);
+            setViewMarginAndGravity(
+                contentContainer, itemPaddingTop, 0, Gravity.CENTER_HORIZONTAL | Gravity.TOP);
             updateViewPaddingBottom(labelGroup, itemPaddingBottom);
+            labelGroup.setVisibility(VISIBLE);
             largeLabel.setVisibility(VISIBLE);
+            smallLabel.setVisibility(INVISIBLE);
           } else {
             // Show icon
-            setViewTopMarginAndGravity(iconContainer, itemPaddingTop, Gravity.CENTER);
+            setViewMarginAndGravity(
+                contentContainer, itemPaddingTop, itemPaddingTop, Gravity.CENTER);
             updateViewPaddingBottom(labelGroup, 0);
-            largeLabel.setVisibility(INVISIBLE);
+            labelGroup.setVisibility(GONE);
           }
-          smallLabel.setVisibility(INVISIBLE);
         } else {
+          labelGroup.setVisibility(VISIBLE);
           updateViewPaddingBottom(labelGroup, itemPaddingBottom);
           if (checked) {
             // Show icon and large label
-            setViewTopMarginAndGravity(
-                iconContainer,
+            setViewMarginAndGravity(
+                contentContainer,
                 (int) (itemPaddingTop + shiftAmount),
+                0,
                 Gravity.CENTER_HORIZONTAL | Gravity.TOP);
             setViewScaleValues(largeLabel, 1f, 1f, VISIBLE);
             setViewScaleValues(smallLabel, scaleUpFactor, scaleUpFactor, INVISIBLE);
           } else {
             // Show icon and small label
-            setViewTopMarginAndGravity(
-                iconContainer, itemPaddingTop, Gravity.CENTER_HORIZONTAL | Gravity.TOP);
+            setViewMarginAndGravity(
+                contentContainer, itemPaddingTop, 0, Gravity.CENTER_HORIZONTAL | Gravity.TOP);
             setViewScaleValues(largeLabel, scaleDownFactor, scaleDownFactor, INVISIBLE);
             setViewScaleValues(smallLabel, 1f, 1f, VISIBLE);
           }
@@ -429,33 +436,36 @@ public void setChecked(boolean checked) {
       case NavigationBarView.LABEL_VISIBILITY_SELECTED:
         if (checked) {
           // Show icon and large label
-          setViewTopMarginAndGravity(
-              iconContainer, itemPaddingTop, Gravity.CENTER_HORIZONTAL | Gravity.TOP);
+          setViewMarginAndGravity(
+              contentContainer, itemPaddingTop, 0, Gravity.CENTER_HORIZONTAL | Gravity.TOP);
           updateViewPaddingBottom(labelGroup, itemPaddingBottom);
+          labelGroup.setVisibility(VISIBLE);
           largeLabel.setVisibility(VISIBLE);
+          smallLabel.setVisibility(INVISIBLE);
         } else {
           // Show icon only
-          setViewTopMarginAndGravity(iconContainer, itemPaddingTop, Gravity.CENTER);
+          setViewMarginAndGravity(contentContainer, itemPaddingTop, itemPaddingTop, Gravity.CENTER);
           updateViewPaddingBottom(labelGroup, 0);
-          largeLabel.setVisibility(INVISIBLE);
+          labelGroup.setVisibility(GONE);
         }
-        smallLabel.setVisibility(INVISIBLE);
         break;
 
       case NavigationBarView.LABEL_VISIBILITY_LABELED:
+        labelGroup.setVisibility(VISIBLE);
         updateViewPaddingBottom(labelGroup, itemPaddingBottom);
         if (checked) {
           // Show icon and large label
-          setViewTopMarginAndGravity(
-              iconContainer,
+          setViewMarginAndGravity(
+              contentContainer,
               (int) (itemPaddingTop + shiftAmount),
+              0,
               Gravity.CENTER_HORIZONTAL | Gravity.TOP);
           setViewScaleValues(largeLabel, 1f, 1f, VISIBLE);
           setViewScaleValues(smallLabel, scaleUpFactor, scaleUpFactor, INVISIBLE);
         } else {
           // Show icon and small label
-          setViewTopMarginAndGravity(
-              iconContainer, itemPaddingTop, Gravity.CENTER_HORIZONTAL | Gravity.TOP);
+          setViewMarginAndGravity(
+              contentContainer, itemPaddingTop, 0, Gravity.CENTER_HORIZONTAL | Gravity.TOP);
           setViewScaleValues(largeLabel, scaleDownFactor, scaleDownFactor, INVISIBLE);
           setViewScaleValues(smallLabel, 1f, 1f, VISIBLE);
         }
@@ -463,9 +473,9 @@ public void setChecked(boolean checked) {
 
       case NavigationBarView.LABEL_VISIBILITY_UNLABELED:
         // Show icon only
-        setViewTopMarginAndGravity(iconContainer, itemPaddingTop, Gravity.CENTER);
-        largeLabel.setVisibility(GONE);
-        smallLabel.setVisibility(GONE);
+        setViewMarginAndGravity(contentContainer, itemPaddingTop, itemPaddingTop, Gravity.CENTER);
+        updateViewPaddingBottom(labelGroup, 0);
+        labelGroup.setVisibility(GONE);
         break;
 
       default:
@@ -525,12 +535,11 @@ private int getItemVisiblePosition() {
     return visiblePosition;
   }
 
-  private static void setViewTopMarginAndGravity(@NonNull View view, int topMargin, int gravity) {
+  private static void setViewMarginAndGravity(
+      @NonNull View view, int topMargin, int bottomMargin, int gravity) {
     LayoutParams viewParams = (LayoutParams) view.getLayoutParams();
     viewParams.topMargin = topMargin;
-    // Set the bottom margin to be equal to the top margin so this view can be centered in it's
-    // parent if gravity is set to CENTER.
-    viewParams.bottomMargin = topMargin;
+    viewParams.bottomMargin = bottomMargin;
     viewParams.gravity = gravity;
     view.setLayoutParams(viewParams);
   }
@@ -620,15 +629,26 @@ public void setIconSize(int iconSize) {
     icon.setLayoutParams(iconParams);
   }
 
+  // TODO(b/338647654): We can remove this once navigation rail is updated
+  public void setMeasureBottomPaddingFromLabelBaseline(boolean measurePaddingFromBaseline) {
+    labelGroup.setMeasurePaddingFromBaseline(measurePaddingFromBaseline);
+    requestLayout();
+  }
+
   public void setTextAppearanceInactive(@StyleRes int inactiveTextAppearance) {
     setTextAppearanceWithoutFontScaling(smallLabel, inactiveTextAppearance);
     calculateTextScaleFactors(smallLabel.getTextSize(), largeLabel.getTextSize());
+    smallLabel.setMinimumHeight(
+        MaterialResources.getUnscaledLineHeight(
+            smallLabel.getContext(), inactiveTextAppearance, 0));
   }
 
   public void setTextAppearanceActive(@StyleRes int activeTextAppearance) {
     this.activeTextAppearance = activeTextAppearance;
     setTextAppearanceWithoutFontScaling(largeLabel, activeTextAppearance);
     calculateTextScaleFactors(smallLabel.getTextSize(), largeLabel.getTextSize());
+    largeLabel.setMinimumHeight(
+        MaterialResources.getUnscaledLineHeight(largeLabel.getContext(), activeTextAppearance, 0));
   }
 
   public void setTextAppearanceActiveBoldEnabled(boolean isBold) {
@@ -774,7 +794,9 @@ public void setItemPaddingBottom(int paddingBottom) {
   public void setActiveIndicatorLabelPadding(int activeIndicatorLabelPadding) {
     if (this.activeIndicatorLabelPadding != activeIndicatorLabelPadding) {
       this.activeIndicatorLabelPadding = activeIndicatorLabelPadding;
-      refreshChecked();
+      LinearLayout.LayoutParams lp = (LinearLayout.LayoutParams) labelGroup.getLayoutParams();
+      lp.topMargin = activeIndicatorLabelPadding;
+      requestLayout();
     }
   }
 
@@ -948,18 +970,13 @@ private int getSuggestedIconWidth() {
 
     // Account for the fact that the badge may fit within the left or right margin. Give the same
     // space of either side so that icon position does not move if badge gravity is changed.
-    LayoutParams iconContainerParams = (LayoutParams) iconContainer.getLayoutParams();
+    LinearLayout.LayoutParams iconContainerParams =
+        (LinearLayout.LayoutParams) iconContainer.getLayoutParams();
     return max(badgeWidth, iconContainerParams.leftMargin)
         + icon.getMeasuredWidth()
         + max(badgeWidth, iconContainerParams.rightMargin);
   }
 
-  private int getSuggestedIconHeight() {
-    LayoutParams iconContainerParams = (LayoutParams) iconContainer.getLayoutParams();
-    return iconContainerParams.topMargin
-        + iconContainer.getMeasuredHeight();
-  }
-
   /**
    * Returns the unique identifier to the drawable resource that must be used to render background
    * of the menu item view. Override this if the subclassed menu item requires a different
diff --git a/lib/java/com/google/android/material/navigation/NavigationBarView.java b/lib/java/com/google/android/material/navigation/NavigationBarView.java
index f706e32864f..94c773ef7cc 100644
--- a/lib/java/com/google/android/material/navigation/NavigationBarView.java
+++ b/lib/java/com/google/android/material/navigation/NavigationBarView.java
@@ -155,6 +155,7 @@ public NavigationBarView(
 
     // Create the menu view.
     menuView = createNavigationBarMenuView(context);
+    menuView.setMinimumHeight(getSuggestedMinimumHeight());
 
     presenter.setMenuView(menuView);
     presenter.setId(MENU_PRESENTER_ID);
diff --git a/lib/java/com/google/android/material/navigation/res/values/ids.xml b/lib/java/com/google/android/material/navigation/res/values/ids.xml
index cc87ea9fae6..adb8d58af13 100644
--- a/lib/java/com/google/android/material/navigation/res/values/ids.xml
+++ b/lib/java/com/google/android/material/navigation/res/values/ids.xml
@@ -21,4 +21,5 @@
   <item type="id" name="navigation_bar_item_labels_group" />
   <item type="id" name="navigation_bar_item_small_label_view" />
   <item type="id" name="navigation_bar_item_large_label_view" />
+  <item type="id" name="navigation_bar_item_content_container" />
 </resources>
diff --git a/lib/java/com/google/android/material/navigationrail/NavigationRailItemView.java b/lib/java/com/google/android/material/navigationrail/NavigationRailItemView.java
index 2a8acfbfb06..eeff801e0e2 100644
--- a/lib/java/com/google/android/material/navigationrail/NavigationRailItemView.java
+++ b/lib/java/com/google/android/material/navigationrail/NavigationRailItemView.java
@@ -33,6 +33,8 @@
 final class NavigationRailItemView extends NavigationBarItemView {
   public NavigationRailItemView(@NonNull Context context) {
     super(context);
+    // TODO(b/338647654): Measure Navigation Rail from the bottom of the textview, not baseline
+    setMeasureBottomPaddingFromLabelBaseline(true);
   }
 
   @Override
diff --git a/lib/java/com/google/android/material/navigationrail/res/layout/mtrl_navigation_rail_item.xml b/lib/java/com/google/android/material/navigationrail/res/layout/mtrl_navigation_rail_item.xml
index e3436fe1632..43b5a4365c5 100644
--- a/lib/java/com/google/android/material/navigationrail/res/layout/mtrl_navigation_rail_item.xml
+++ b/lib/java/com/google/android/material/navigationrail/res/layout/mtrl_navigation_rail_item.xml
@@ -1,4 +1,5 @@
-<?xml version="1.0" encoding="utf-8"?><!--
+<?xml version="1.0" encoding="utf-8"?>
+<!--
   ~ Copyright (C) 2021 The Android Open Source Project
   ~
   ~ Licensed under the Apache License, Version 2.0 (the "License");
@@ -14,38 +15,47 @@
   ~ limitations under the License.
   -->
 <merge xmlns:android="http://schemas.android.com/apk/res/android">
-
-  <FrameLayout
-    android:id="@+id/navigation_bar_item_icon_container"
+  <LinearLayout
+    android:id="@id/navigation_bar_item_content_container"
     android:layout_width="wrap_content"
     android:layout_height="wrap_content"
-    android:layout_gravity="center_horizontal"
+    android:layout_gravity="top|center_horizontal"
+    android:clipChildren="false"
+    android:orientation="vertical"
+    android:gravity="center"
     android:layout_marginTop="@dimen/mtrl_navigation_rail_margin"
-    android:layout_marginBottom="@dimen/mtrl_navigation_rail_text_bottom_margin"
     android:duplicateParentState="true">
-    <View
-      android:id="@+id/navigation_bar_item_active_indicator_view"
-      android:layout_width="0dp"
-      android:layout_height="0dp"
-      android:layout_gravity="center"/>
-    <ImageView
-      android:id="@id/navigation_bar_item_icon_view"
-      android:layout_width="@dimen/mtrl_navigation_rail_icon_size"
-      android:layout_height="@dimen/mtrl_navigation_rail_icon_size"
+
+    <FrameLayout
+      android:id="@id/navigation_bar_item_icon_container"
+      android:layout_width="wrap_content"
+      android:layout_height="wrap_content"
       android:layout_gravity="center"
-      android:contentDescription="@null"
-      android:duplicateParentState="true" />
-  </FrameLayout>
-  <com.google.android.material.internal.BaselineLayout
+      android:duplicateParentState="true">
+      <View
+        android:id="@id/navigation_bar_item_active_indicator_view"
+        android:layout_width="0dp"
+        android:layout_height="0dp"
+        android:layout_gravity="center" />
+      <ImageView
+        android:id="@id/navigation_bar_item_icon_view"
+        android:layout_width="@dimen/mtrl_navigation_rail_icon_size"
+        android:layout_height="@dimen/mtrl_navigation_rail_icon_size"
+        android:layout_gravity="center"
+        android:contentDescription="@null"
+        android:duplicateParentState="true" />
+    </FrameLayout>
+    <com.google.android.material.internal.BaselineLayout
       android:id="@id/navigation_bar_item_labels_group"
       android:layout_width="wrap_content"
       android:layout_height="wrap_content"
+      android:layout_marginTop="@dimen/m3_navigation_rail_icon_label_padding"
       android:paddingBottom="@dimen/mtrl_navigation_rail_text_bottom_margin"
-      android:layout_gravity="bottom|center_horizontal"
       android:clipChildren="false"
       android:clipToPadding="false"
+      android:layout_gravity="center"
       android:duplicateParentState="true">
-    <TextView
+      <TextView
         android:id="@id/navigation_bar_item_small_label_view"
         android:layout_width="wrap_content"
         android:layout_height="wrap_content"
@@ -55,7 +65,7 @@
         android:paddingStart="@dimen/m3_navigation_rail_label_padding_horizontal"
         android:paddingEnd="@dimen/m3_navigation_rail_label_padding_horizontal"
         android:textSize="@dimen/mtrl_navigation_rail_text_size" />
-    <TextView
+      <TextView
         android:id="@id/navigation_bar_item_large_label_view"
         android:layout_width="wrap_content"
         android:layout_height="wrap_content"
@@ -66,5 +76,6 @@
         android:paddingStart="@dimen/m3_navigation_rail_label_padding_horizontal"
         android:paddingEnd="@dimen/m3_navigation_rail_label_padding_horizontal"
         android:visibility="invisible" />
-  </com.google.android.material.internal.BaselineLayout>
+    </com.google.android.material.internal.BaselineLayout>
+  </LinearLayout>
 </merge>
diff --git a/lib/java/com/google/android/material/navigationrail/res/values/dimens.xml b/lib/java/com/google/android/material/navigationrail/res/values/dimens.xml
index b19aeacd90b..b587fcfa54a 100644
--- a/lib/java/com/google/android/material/navigationrail/res/values/dimens.xml
+++ b/lib/java/com/google/android/material/navigationrail/res/values/dimens.xml
@@ -38,5 +38,6 @@
   <dimen name="m3_navigation_rail_item_active_indicator_height">@dimen/m3_comp_navigation_rail_active_indicator_height</dimen>
   <dimen name="m3_navigation_rail_item_active_indicator_margin_horizontal">4dp</dimen>
   <dimen name="m3_navigation_rail_label_padding_horizontal">2dp</dimen>
+  <dimen name="m3_navigation_rail_icon_label_padding">4dp</dimen>
 
 </resources>
diff --git a/lib/java/com/google/android/material/navigationrail/res/values/styles.xml b/lib/java/com/google/android/material/navigationrail/res/values/styles.xml
index 1b6a429baeb..61d431d5920 100644
--- a/lib/java/com/google/android/material/navigationrail/res/values/styles.xml
+++ b/lib/java/com/google/android/material/navigationrail/res/values/styles.xml
@@ -82,6 +82,7 @@
     <item name="itemTextAppearanceInactive">@macro/m3_comp_navigation_rail_label_text_type</item>
     <item name="itemTextAppearanceActive">@macro/m3_comp_navigation_rail_label_text_type</item>
     <item name="materialThemeOverlay">@style/ThemeOverlay.Material3.NavigationRailView</item>
+    <item name="activeIndicatorLabelPadding">@dimen/m3_navigation_rail_icon_label_padding</item>
   </style>
 
   <style name="Widget.Material3.NavigationRailView.ActiveIndicator" parent="">
diff --git a/lib/java/com/google/android/material/resources/MaterialResources.java b/lib/java/com/google/android/material/resources/MaterialResources.java
index 1e343223282..4f8b4a68959 100644
--- a/lib/java/com/google/android/material/resources/MaterialResources.java
+++ b/lib/java/com/google/android/material/resources/MaterialResources.java
@@ -223,6 +223,37 @@ public static int getUnscaledTextSize(
         v.data, context.getResources().getDisplayMetrics());
   }
 
+  public static int getUnscaledLineHeight(
+      @NonNull Context context, @StyleRes int textAppearance, int defValue) {
+    if (textAppearance == 0) {
+      return defValue;
+    }
+
+    TypedArray a = context.obtainStyledAttributes(textAppearance,
+        R.styleable.MaterialTextAppearance);
+    TypedValue v = new TypedValue();
+    boolean available = a.getValue(R.styleable.MaterialTextAppearance_lineHeight, v);
+    if (!available) {
+      available = a.getValue(R.styleable.MaterialTextAppearance_android_lineHeight, v);
+    }
+    a.recycle();
+
+    if (!available) {
+      return defValue;
+    }
+
+    if (getComplexUnit(v) == TypedValue.COMPLEX_UNIT_SP) {
+      // Get the raw value. If the line height is set to 14sp in the dimen file, this will return
+      // 14. Scale the raw value using density and round to avoid truncating.
+      return Math.round(
+          TypedValue.complexToFloat(v.data) * context.getResources().getDisplayMetrics().density);
+    }
+
+    // If the resource is not is sp, return with regular resource system scaling.
+    return TypedValue.complexToDimensionPixelSize(
+        v.data, context.getResources().getDisplayMetrics());
+  }
+
   /**
    * Return the complex unit type for the given value.
    *
diff --git a/lib/javatests/com/google/android/material/navigation/res/layout/test_navigation_bar_item_layout.xml b/lib/javatests/com/google/android/material/navigation/res/layout/test_navigation_bar_item_layout.xml
index 02c14d1831b..385e725363e 100644
--- a/lib/javatests/com/google/android/material/navigation/res/layout/test_navigation_bar_item_layout.xml
+++ b/lib/javatests/com/google/android/material/navigation/res/layout/test_navigation_bar_item_layout.xml
@@ -15,52 +15,62 @@
   ~ limitations under the License.
   -->
 <merge xmlns:android="http://schemas.android.com/apk/res/android">
-  <FrameLayout
-    android:id="@id/navigation_bar_item_icon_container"
-    android:layout_width="wrap_content"
-    android:layout_height="wrap_content"
-    android:layout_gravity="center_horizontal"
-    android:layout_marginTop="@dimen/mtrl_navigation_bar_item_default_margin"
-    android:layout_marginBottom="@dimen/mtrl_navigation_bar_item_default_margin"
-    android:duplicateParentState="true">
-    <View
-      android:id="@id/navigation_bar_item_active_indicator_view"
-      android:layout_width="0dp"
-      android:layout_height="0dp"
-      android:layout_gravity="center" />
-    <ImageView
-      android:id="@id/navigation_bar_item_icon_view"
-      android:layout_width="24dp"
-      android:layout_height="24dp"
-      android:layout_gravity="center_horizontal"
-      android:contentDescription="@null"
-      android:duplicateParentState="true"/>
-  </FrameLayout>
-  <com.google.android.material.internal.BaselineLayout
-      android:id="@id/navigation_bar_item_labels_group"
+    <LinearLayout
+      android:id="@id/navigation_bar_item_content_container"
       android:layout_width="wrap_content"
       android:layout_height="wrap_content"
-      android:layout_gravity="bottom|center_horizontal"
-      android:paddingBottom="@dimen/test_navigation_bar_label_padding"
+      android:layout_gravity="top|center_horizontal"
       android:clipChildren="false"
       android:clipToPadding="false"
+      android:orientation="vertical"
+      android:gravity="center"
       android:duplicateParentState="true">
-    <TextView
-        android:id="@id/navigation_bar_item_small_label_view"
+
+      <FrameLayout
+        android:id="@id/navigation_bar_item_icon_container"
         android:layout_width="wrap_content"
         android:layout_height="wrap_content"
-        android:duplicateParentState="true"
-        android:ellipsize="end"
-        android:maxLines="1"
-        android:textSize="@dimen/test_navigation_bar_text_size"/>
-    <TextView
-        android:id="@id/navigation_bar_item_large_label_view"
+        android:duplicateParentState="true">
+        <View
+          android:id="@id/navigation_bar_item_active_indicator_view"
+          android:layout_width="0dp"
+          android:layout_height="0dp"
+          android:layout_gravity="center" />
+        <ImageView
+          android:id="@id/navigation_bar_item_icon_view"
+          android:layout_width="24dp"
+          android:layout_height="24dp"
+          android:layout_gravity="center"
+          android:contentDescription="@null"
+          android:duplicateParentState="true"/>
+      </FrameLayout>
+      <com.google.android.material.internal.BaselineLayout
+        android:id="@id/navigation_bar_item_labels_group"
         android:layout_width="wrap_content"
         android:layout_height="wrap_content"
-        android:duplicateParentState="true"
-        android:ellipsize="end"
-        android:maxLines="1"
-        android:textSize="@dimen/test_navigation_bar_active_text_size"
-        android:visibility="invisible"/>
-  </com.google.android.material.internal.BaselineLayout>
+        android:layout_marginTop="4dp"
+        android:clipChildren="false"
+        android:clipToPadding="false"
+        android:duplicateParentState="true">
+        <TextView
+          android:id="@id/navigation_bar_item_small_label_view"
+          android:layout_width="wrap_content"
+          android:layout_height="wrap_content"
+          android:duplicateParentState="true"
+          android:ellipsize="end"
+          android:gravity="center"
+          android:maxLines="1"
+          android:textSize="@dimen/design_bottom_navigation_text_size"/>
+        <TextView
+          android:id="@id/navigation_bar_item_large_label_view"
+          android:layout_width="wrap_content"
+          android:layout_height="wrap_content"
+          android:duplicateParentState="true"
+          android:ellipsize="end"
+          android:maxLines="1"
+          android:gravity="center"
+          android:textSize="@dimen/design_bottom_navigation_active_text_size"
+          android:visibility="invisible"/>
+      </com.google.android.material.internal.BaselineLayout>
+    </LinearLayout>
 </merge>