diff --git a/goldens/public-api/core/core.d.ts b/goldens/public-api/core/core.d.ts
index 21137006a1..79aa358ef6 100644
--- a/goldens/public-api/core/core.d.ts
+++ b/goldens/public-api/core/core.d.ts
@@ -952,7 +952,7 @@ export declare class TestabilityRegistry {
 }
 
 export declare interface TrackByFunction<T> {
-    (index: number, item: T): any;
+    <U extends T>(index: number, item: U): any;
 }
 
 export declare const TRANSLATIONS: InjectionToken<string>;
diff --git a/packages/compiler-cli/src/ngtsc/testing/fake_core/index.ts b/packages/compiler-cli/src/ngtsc/testing/fake_core/index.ts
index 7632c14450..db86935d3d 100644
--- a/packages/compiler-cli/src/ngtsc/testing/fake_core/index.ts
+++ b/packages/compiler-cli/src/ngtsc/testing/fake_core/index.ts
@@ -116,5 +116,5 @@ export interface OnDestroy {
 }
 
 export interface TrackByFunction<T> {
-  (index: number, item: T): any;
+  <U extends T>(index: number, item: U): any;
 }
diff --git a/packages/compiler-cli/test/ngtsc/template_typecheck_spec.ts b/packages/compiler-cli/test/ngtsc/template_typecheck_spec.ts
index ce9bc10924..8a34d3e07b 100644
--- a/packages/compiler-cli/test/ngtsc/template_typecheck_spec.ts
+++ b/packages/compiler-cli/test/ngtsc/template_typecheck_spec.ts
@@ -940,6 +940,43 @@ export declare class AnimationEvent {
       env.driveMain();
     });
 
+    // https://github.com/angular/angular/issues/40125
+    it('should accept NgFor iteration when trackBy is used with a wider type', () => {
+      env.tsconfig({strictTemplates: true});
+      env.write('test.ts', `
+        import {CommonModule} from '@angular/common';
+        import {Component, NgModule} from '@angular/core';
+
+        interface Base {
+          id: string;
+        }
+
+        interface Derived extends Base {
+          name: string;
+        }
+
+        @Component({
+          selector: 'test',
+          template: '<div *ngFor="let derived of derivedList; trackBy: trackByBase">{{derived.name}}</div>',
+        })
+        class TestCmp {
+          derivedList!: Derived[];
+
+          trackByBase(index: number, item: Base): string {
+            return item.id;
+          }
+        }
+
+        @NgModule({
+          declarations: [TestCmp],
+          imports: [CommonModule],
+        })
+        class Module {}
+    `);
+
+      env.driveMain();
+    });
+
     it('should infer the context of NgFor', () => {
       env.tsconfig({strictTemplates: true});
       env.write('test.ts', `
diff --git a/packages/core/src/change_detection/differs/iterable_differs.ts b/packages/core/src/change_detection/differs/iterable_differs.ts
index ec90548e33..bd2c7543cf 100644
--- a/packages/core/src/change_detection/differs/iterable_differs.ts
+++ b/packages/core/src/change_detection/differs/iterable_differs.ts
@@ -157,11 +157,17 @@ export interface IterableChangeRecord<V> {
  * @publicApi
  */
 export interface TrackByFunction<T> {
+  // Note: the type parameter `U` enables more accurate template type checking in case a trackBy
+  // function is declared using a base type of the iterated type. The `U` type gives TypeScript
+  // additional freedom to infer a narrower type for the `item` parameter type, instead of imposing
+  // the trackBy's declared item type as the inferred type for `T`.
+  // See https://github.com/angular/angular/issues/40125
+
   /**
    * @param index The index of the item within the iterable.
    * @param item The item in the iterable.
    */
-  (index: number, item: T): any;
+  <U extends T>(index: number, item: U): any;
 }
 
 /**