diff --git a/controllers/helpers.go b/controllers/helpers.go
index 6fa6ff6932..e8b76e81bd 100644
--- a/controllers/helpers.go
+++ b/controllers/helpers.go
@@ -504,9 +504,11 @@ func deleteCategoryKeyValues(ctx context.Context, client *prismclientv3.Client,
 
 			err = client.V3.DeleteCategoryValue(ctx, key, value)
 			if err != nil {
-				errorMsg := fmt.Errorf("failed to delete category with key %s. error: %v", key, err)
-				log.Error(errorMsg, "failed to delete category")
-				return errorMsg
+				errorMsg := fmt.Errorf("failed to delete category value with key:value %s:%s. error: %v", key, value, err)
+				log.Error(errorMsg, "failed to delete category value")
+				// NCN-101935: If the category value still has VMs assigned, do not delete the category key:value
+				// TODO:deepakmntnx Add a check for specific error mentioned in NCN-101935
+				return nil
 			}
 		}
 
diff --git a/test/e2e/categories_test.go b/test/e2e/categories_test.go
index 08989c8f8a..0ff9349947 100644
--- a/test/e2e/categories_test.go
+++ b/test/e2e/categories_test.go
@@ -20,6 +20,7 @@ package e2e
 
 import (
 	"context"
+	"os"
 
 	. "github.com/onsi/ginkgo/v2"
 	. "github.com/onsi/gomega"
@@ -174,4 +175,83 @@ var _ = Describe("Nutanix categories", Label("capx-feature-test", "categories"),
 
 		By("PASSED!")
 	})
+
+	It("Create and delete 2 clusters with same name with default cluster categories and should succeed", Label("same-name-two-cluster-test"), func() {
+		Expect(namespace).NotTo(BeNil())
+		flavor := clusterctl.DefaultFlavor
+		expectedClusterNameCategoryKey := infrav1.DefaultCAPICategoryKeyForName
+		By("Creating a workload cluster 1", func() {
+			testHelper.deployClusterAndWait(
+				deployClusterParams{
+					clusterName:           clusterName,
+					namespace:             namespace,
+					flavor:                flavor,
+					clusterctlConfigPath:  clusterctlConfigPath,
+					artifactFolder:        artifactFolder,
+					bootstrapClusterProxy: bootstrapClusterProxy,
+				}, clusterResources)
+		})
+
+		By("Checking cluster category condition is true", func() {
+			testHelper.verifyConditionOnNutanixCluster(verifyConditionParams{
+				clusterName:           clusterName,
+				namespace:             namespace,
+				bootstrapClusterProxy: bootstrapClusterProxy,
+				expectedCondition: clusterv1.Condition{
+					Type:   infrav1.ClusterCategoryCreatedCondition,
+					Status: corev1.ConditionTrue,
+				},
+			})
+		})
+
+		By("Checking if a category was created", func() {
+			testHelper.verifyCategoryExists(ctx, expectedClusterNameCategoryKey, clusterName)
+		})
+
+		By("Checking if there are VMs assigned to this category", func() {
+			expectedCategories := map[string]string{
+				expectedClusterNameCategoryKey: clusterName,
+			}
+			testHelper.verifyCategoriesNutanixMachines(ctx, clusterName, namespace.Name, expectedCategories)
+		})
+
+		os.Setenv("CONTROL_PLANE_ENDPOINT_IP", os.Getenv("CONTROL_PLANE_ENDPOINT_IP_2"))
+		By("Creating a workload cluster 2 with same name", func() {
+			testHelper.deployClusterAndWait(
+				deployClusterParams{
+					clusterName:           clusterName,
+					namespace:             namespace,
+					flavor:                flavor,
+					clusterctlConfigPath:  clusterctlConfigPath,
+					artifactFolder:        artifactFolder,
+					bootstrapClusterProxy: bootstrapClusterProxy,
+				}, clusterResources)
+		})
+
+		By("Checking cluster category condition is true", func() {
+			testHelper.verifyConditionOnNutanixCluster(verifyConditionParams{
+				clusterName:           clusterName,
+				namespace:             namespace,
+				bootstrapClusterProxy: bootstrapClusterProxy,
+				expectedCondition: clusterv1.Condition{
+					Type:   infrav1.ClusterCategoryCreatedCondition,
+					Status: corev1.ConditionTrue,
+				},
+			})
+		})
+
+		By("Checking if a category was created", func() {
+			testHelper.verifyCategoryExists(ctx, expectedClusterNameCategoryKey, clusterName)
+		})
+
+		By("Checking if there are VMs assigned to this category", func() {
+			expectedCategories := map[string]string{
+				expectedClusterNameCategoryKey: clusterName,
+			}
+			testHelper.verifyCategoriesNutanixMachines(ctx, clusterName, namespace.Name, expectedCategories)
+		})
+
+		// After each test, cluster with name clusterName will be deleted and if it fails due to categories
+		// issue then we will know since the test will fail.
+	})
 })