diff --git a/compiler/ballerina-lang/src/main/java/org/wso2/ballerinalang/compiler/semantics/analyzer/SemanticAnalyzer.java b/compiler/ballerina-lang/src/main/java/org/wso2/ballerinalang/compiler/semantics/analyzer/SemanticAnalyzer.java
index 3e2a6bb5831c..e421fc71cfe1 100644
--- a/compiler/ballerina-lang/src/main/java/org/wso2/ballerinalang/compiler/semantics/analyzer/SemanticAnalyzer.java
+++ b/compiler/ballerina-lang/src/main/java/org/wso2/ballerinalang/compiler/semantics/analyzer/SemanticAnalyzer.java
@@ -4480,7 +4480,7 @@ private void handleForeachDefinitionVariables(VariableDefinitionNode variableDef
         // If the type node is available, we get the type from it.
         BType typeNodeType = symResolver.resolveTypeNode(variableNode.typeNode, blockEnv);
         // Checking whether the RHS type is assignable to LHS type.
-        if (types.isAssignable(varType, typeNodeType)) {
+        if (types.constituentTypesAssignable(varType, typeNodeType)) {
             if (onFail && varType == symTable.neverType) {
                 varType = typeNodeType;
             }
diff --git a/compiler/ballerina-lang/src/main/java/org/wso2/ballerinalang/compiler/semantics/analyzer/Types.java b/compiler/ballerina-lang/src/main/java/org/wso2/ballerinalang/compiler/semantics/analyzer/Types.java
index b6f80c1f19cf..855fd31e18af 100644
--- a/compiler/ballerina-lang/src/main/java/org/wso2/ballerinalang/compiler/semantics/analyzer/Types.java
+++ b/compiler/ballerina-lang/src/main/java/org/wso2/ballerinalang/compiler/semantics/analyzer/Types.java
@@ -1456,7 +1456,7 @@ private boolean isFunctionTypeAssignable(BInvokableType source, BInvokableType t
                 boolean isTypeParam = TypeParamAnalyzer.isTypeParam(targetParam);
 
                 if (isTypeParam) {
-                    if (!isAssignable(sourceParam, targetParam)) {
+                    if (!constituentTypesAssignable(sourceParam, targetParam)) {
                         return false;
                     }
                 } else {
@@ -1481,6 +1481,17 @@ private boolean isFunctionTypeAssignable(BInvokableType source, BInvokableType t
         return checkFunctionTypeEquality(source, target, unresolvedTypes, (s, t, ut) -> isAssignable(t, s, ut));
     }
 
+    public boolean constituentTypesAssignable(BType varType, BType typeNodeType) {
+        if (varType.tag == TypeTags.XML) {
+            typeNodeType = getReferredType(typeNodeType);
+            if (typeNodeType.tag == TypeTags.UNION) {
+                return isAssignable(symTable.xmlItemType, typeNodeType);
+            }
+            return typeNodeType.tag == TypeTags.XML;
+        }
+        return isAssignable(varType, typeNodeType);
+    }
+
     public boolean isInherentlyImmutableType(BType type) {
         type = getImpliedType(type);
         if (isValueType(type)) {
@@ -3681,11 +3692,6 @@ private boolean isAssignableToUnionType(BType source, BType target, Set<TypePair
                 sourceIterator.remove();
                 continue;
             }
-            if (sMember.tag == TypeTags.XML &&
-                    isAssignableToUnionType(expandedXMLBuiltinSubtypes, target, unresolvedTypes)) {
-                sourceIterator.remove();
-                continue;
-            }
 
             if (!isValueType(sMember)) {
                 if (!targetIsAUnion) {
diff --git a/compiler/ballerina-lang/src/main/java/org/wso2/ballerinalang/compiler/semantics/model/SymbolTable.java b/compiler/ballerina-lang/src/main/java/org/wso2/ballerinalang/compiler/semantics/model/SymbolTable.java
index 2700a855b958..a88568c98807 100644
--- a/compiler/ballerina-lang/src/main/java/org/wso2/ballerinalang/compiler/semantics/model/SymbolTable.java
+++ b/compiler/ballerina-lang/src/main/java/org/wso2/ballerinalang/compiler/semantics/model/SymbolTable.java
@@ -178,9 +178,10 @@ public class SymbolTable {
     public final BRegexpType regExpType = new BRegexpType(TypeTags.REGEXP, Names.REGEXP_TYPE);
     public final BType xmlNeverType = new BXMLType(neverType,  null);
     public final BType xmlElementSeqType = new BXMLType(xmlElementType, null);
+    public final BType xmlItemType = BUnionType.create(null, xmlElementType, xmlCommentType,
+            xmlPIType, xmlTextType);
 
-    public final BType xmlType = new BXMLType(BUnionType.create(null, xmlElementType, xmlCommentType,
-            xmlPIType, xmlTextType),  null);
+    public final BType xmlType = new BXMLType(xmlItemType,  null);
 
     public BAnydataType anydataType;
     public BArrayType arrayAnydataType;
diff --git a/tests/jballerina-unit-test/src/test/java/org/ballerinalang/test/types/xml/XMLLiteralTest.java b/tests/jballerina-unit-test/src/test/java/org/ballerinalang/test/types/xml/XMLLiteralTest.java
index 67b2a38df455..2c19181e5767 100644
--- a/tests/jballerina-unit-test/src/test/java/org/ballerinalang/test/types/xml/XMLLiteralTest.java
+++ b/tests/jballerina-unit-test/src/test/java/org/ballerinalang/test/types/xml/XMLLiteralTest.java
@@ -213,6 +213,17 @@ public void testXMLNegativeSemantics() {
                 "'(xml<xml<xml:Text>>|xml<xml<xml:Comment>>)', found 'xml'", 150, 54);
         BAssertUtil.validateError(negativeResult, index++, "missing gt token", 154, 22);
         BAssertUtil.validateError(negativeResult, index++, "missing gt token", 155, 28);
+        BAssertUtil.validateError(negativeResult, index++, "incompatible types: expected 'UX', found 'X'", 166, 12);
+        BAssertUtil.validateError(negativeResult, index++, "incompatible types: expected 'UX', found 'X'", 169, 12);
+        BAssertUtil.validateError(negativeResult, index++, "incompatible types: expected 'UX', found 'X'", 172, 12);
+        BAssertUtil.validateError(negativeResult, index++, "incompatible types: expected 'UX', found 'X'", 175, 12);
+        BAssertUtil.validateError(negativeResult, index++, "incompatible types: expected 'UX', found 'X'", 178, 12);
+        BAssertUtil.validateError(negativeResult, index++, "incompatible types: expected 'UX', found 'X'", 181, 12);
+        BAssertUtil.validateError(negativeResult, index++, "incompatible types: expected 'UX', found 'X'", 184, 12);
+        BAssertUtil.validateError(negativeResult, index++, "incompatible types: expected 'UX', found 'X'", 187, 12);
+        BAssertUtil.validateError(negativeResult, index++, "incompatible types: expected 'UX', found 'X'", 190, 12);
+        BAssertUtil.validateError(negativeResult, index++, "incompatible types: expected 'UX', found 'X'", 193, 12);
+        BAssertUtil.validateError(negativeResult, index++, "incompatible types: expected 'UX', found 'X'", 196, 12);
         Assert.assertEquals(index, negativeResult.getErrorCount());
     }
 
@@ -456,6 +467,11 @@ public void testXMLLiteralWithConditionExpr() {
         BRunUtil.invoke(result, "testXMLLiteralWithConditionExpr");
     }
 
+    @Test
+    public void testXMLSubtype() {
+        BRunUtil.invoke(result, "testXMLSubtype");
+    }
+
     @AfterClass
     public void tearDown() {
         result = null;
diff --git a/tests/jballerina-unit-test/src/test/resources/test-src/types/xml/xml-literals-negative.bal b/tests/jballerina-unit-test/src/test/resources/test-src/types/xml/xml-literals-negative.bal
index 3952bce53638..cbdd6a92d217 100644
--- a/tests/jballerina-unit-test/src/test/resources/test-src/types/xml/xml-literals-negative.bal
+++ b/tests/jballerina-unit-test/src/test/resources/test-src/types/xml/xml-literals-negative.bal
@@ -154,3 +154,44 @@ function testMissingClosingGTToken() {
     xml x1 = xml `<a/a>`;
     xml x2 = xml `<a n="a"/a>`;
 }
+
+type X xml;
+type XE xml<xml:Element>;
+type XP xml<xml:ProcessingInstruction>;
+type XC xml<xml:Comment>;
+type UX XE|XP|XC|xml:Text;
+
+function testXMLInvalidSubtype() {
+    X x1 = xml `<a></a><b></b>`;
+    UX _ = x1;
+
+    X x2 = xml `<?target instructions?><?a data?>`;
+    UX _ = x2;
+
+    X x3 = xml `<!--comment one--><!--comment two-->`;
+    UX _ = x3;
+
+    X x4 = xml `random sequence of text`;
+    UX _ = x4;
+
+    X x5 = xml `<a></a><b></b><?target instructions?><?c data?>`;
+    UX _ = x5;
+
+    X x6 = xml `<a></a><b></b><!--comment one--><!--comment two-->`;
+    UX _ = x6;
+
+    X x7 = xml `<a></a><b></b>random text`;
+    UX _ = x7;
+
+    X x8 = xml `<?target instructions?><?a data?>text`;
+    UX _ = x8;
+
+    X x9 = xml `<?target instructions?><?a data?><!--comment one--><!--comment two-->`;
+    UX _ = x9;
+
+    X x10 = xml `<!--comment one--><!--comment two-->text`;
+    UX _ = x10;
+
+    X x11 = xml `<a></a><b></b><?d data?><?c data?>?><!--comment--><!--comment-->text`;
+    UX _ = x11;
+}
diff --git a/tests/jballerina-unit-test/src/test/resources/test-src/types/xml/xml-literals.bal b/tests/jballerina-unit-test/src/test/resources/test-src/types/xml/xml-literals.bal
index 860cb022a42d..e6b6ffd17f18 100644
--- a/tests/jballerina-unit-test/src/test/resources/test-src/types/xml/xml-literals.bal
+++ b/tests/jballerina-unit-test/src/test/resources/test-src/types/xml/xml-literals.bal
@@ -467,3 +467,75 @@ function testXMLLiteralWithConditionExpr() {
     xml w3 = (s ?: (s ?: (v1 is xml:Element ? e2 : xml `<user>Foo</user>`))) + xml `<element>B</element>`;
     test:assertEquals(w3.toString(), "<user>Foo</user><element>B</element>");
 }
+
+type X xml;
+type XE xml<xml:Element>;
+type XP xml<xml:ProcessingInstruction>;
+type XC xml<xml:Comment>;
+type UX XE|XP|XC|xml:Text;
+
+function testXMLSubtype() {
+    X x1 = xml `<a></a><b></b>`;
+    UX _ = <UX>x1;
+
+    X x2 = xml `<?target instructions?><?a data?>`;
+    UX _ = <UX>x2;
+
+    X x3 = xml `<!--comment one--><!--comment two-->`;
+    UX _ = <UX>x3;
+
+    X x4 = xml `random sequence of text`;
+    UX _ = <UX>x4;
+
+    UX|error ux;
+    X x5 = xml `<a></a><b></b><?target instructions?><?c data?>`;
+    ux = trap <UX>x5;
+    assertError(ux, "{ballerina}TypeCastError",
+        "incompatible types: 'xml<(lang.xml:Element|lang.xml:Comment|lang.xml:ProcessingInstruction|lang.xml:Text)>' cannot be cast to 'UX'");
+
+    X x6 = xml `<a></a><b></b><!--comment one--><!--comment two-->`;
+    ux = trap <UX>x6;
+    assertError(ux, "{ballerina}TypeCastError",
+        "incompatible types: 'xml<(lang.xml:Element|lang.xml:Comment|lang.xml:ProcessingInstruction|lang.xml:Text)>' cannot be cast to 'UX'");
+
+    X x7 = xml `<a></a><b></b>random text`;
+    ux = trap <UX>x7;
+    assertError(ux, "{ballerina}TypeCastError",
+        "incompatible types: 'xml<(lang.xml:Element|lang.xml:Comment|lang.xml:ProcessingInstruction|lang.xml:Text)>' cannot be cast to 'UX'");
+
+    X x8 = xml `<?target instructions?><?a data?>text`;
+    ux = trap <UX>x8;
+    assertError(ux, "{ballerina}TypeCastError",
+        "incompatible types: 'xml<(lang.xml:Element|lang.xml:Comment|lang.xml:ProcessingInstruction|lang.xml:Text)>' cannot be cast to 'UX'");
+
+    X x9 = xml `<?target instructions?><?a data?><!--comment one--><!--comment two-->`;
+    ux = trap <UX>x9;
+    assertError(ux, "{ballerina}TypeCastError",
+        "incompatible types: 'xml<(lang.xml:Element|lang.xml:Comment|lang.xml:ProcessingInstruction|lang.xml:Text)>' cannot be cast to 'UX'");
+
+    X x10 = xml `<!--comment one--><!--comment two-->text`;
+    ux = trap <UX>x10;
+    assertError(ux, "{ballerina}TypeCastError",
+        "incompatible types: 'xml<(lang.xml:Element|lang.xml:Comment|lang.xml:ProcessingInstruction|lang.xml:Text)>' cannot be cast to 'UX'");
+
+    X x11 = xml `<a></a><b></b><?d data?><?c data?>?><!--comment--><!--comment-->text`;
+    ux = trap <UX>x11;
+    assertError(ux, "{ballerina}TypeCastError",
+        "incompatible types: 'xml<(lang.xml:Element|lang.xml:Comment|lang.xml:ProcessingInstruction|lang.xml:Text)>' cannot be cast to 'UX'");
+}
+
+type Error error<record {string message;}>;
+
+function assertError(any|error value, string errorMessage, string expDetailMessage) {
+    if value is Error {
+        if value.message() != errorMessage {
+            panic error("Expected error message: " + errorMessage + " found: " + value.message());
+        }
+
+        if value.detail().message == expDetailMessage {
+            return;
+        }
+        panic error("Expected error detail message: " + expDetailMessage + " found: " + value.detail().message);
+    }
+    panic error("Expected: Error, found: " + (typeof value).toString());
+}