diff --git a/python/src/com/jetbrains/python/editor/PythonCopyPasteProcessor.java b/python/src/com/jetbrains/python/editor/PythonCopyPasteProcessor.java
index 8bf8cf12cdf2..5992c1689626 100644
--- a/python/src/com/jetbrains/python/editor/PythonCopyPasteProcessor.java
+++ b/python/src/com/jetbrains/python/editor/PythonCopyPasteProcessor.java
@@ -12,7 +12,10 @@ import com.intellij.psi.PsiElement;
 import com.intellij.psi.PsiFile;
 import com.intellij.psi.PsiWhiteSpace;
 import com.intellij.psi.util.PsiUtilCore;
+import com.jetbrains.python.psi.PyClass;
 import com.jetbrains.python.psi.PyFile;
+import com.jetbrains.python.psi.PyFunction;
+import com.jetbrains.python.psi.PyStatementList;
 
 import java.util.List;
 
@@ -48,7 +51,32 @@ public class PythonCopyPasteProcessor implements CopyPastePreProcessor {
       final int lineNumber = document.getLineNumber(caretOffset);
       final int offset = getLineStartSafeOffset(document, lineNumber);
       final PsiElement element1 = PsiUtilCore.getElementAtOffset(file, offset);
+      boolean moved = false;
       if (element instanceof PsiWhiteSpace && element == element1) {
+        final PsiElement prevSibling = element.getPrevSibling();
+        PyStatementList statementList = null;
+        if (prevSibling instanceof PyFunction) {
+          statementList = ((PyFunction)prevSibling).getStatementList();
+        }
+        else if (prevSibling instanceof PyClass) {
+          statementList = ((PyClass)prevSibling).getStatementList();
+        }
+        // Caret beyond actual indent -- move to the actual offset
+        if (statementList != null) {
+          final PsiElement lastChild = statementList.getLastChild();
+          if (lastChild != null) {
+            final PsiElement whiteSpace = lastChild.getPrevSibling();
+            if (whiteSpace instanceof PsiWhiteSpace) {
+              int relatedOffset = whiteSpace.getTextRange().getEndOffset();
+              final int indent = relatedOffset - getLineStartSafeOffset(document, document.getLineNumber(relatedOffset));
+              if (caretOffset > indent) {
+                caretModel.moveToOffset(offset + indent);
+                moved = true;
+              }
+            }
+          }
+        }
+
         final List<String> strings = StringUtil.split(element.getText(), "\n");
         //user already prepared place to paste to and we just want to indent right
         if (StringUtil.countChars(element.getText(), '\n') > 2) {
@@ -62,7 +90,7 @@ public class PythonCopyPasteProcessor implements CopyPastePreProcessor {
           if (!strings.isEmpty())
             newText += strings.get(strings.size()-1);
           //pasted text'll be the only one statement in block
-          if (!element.getText().endsWith("\n"))
+          if (!element.getText().endsWith("\n") && !moved)
             caretModel.moveToOffset(element.getTextRange().getEndOffset());
         }
       }
diff --git a/python/testData/copyPaste/multiLine/IndentInnerFunction2.after.py b/python/testData/copyPaste/multiLine/IndentInnerFunction2.after.py
new file mode 100644
index 000000000000..933900cac4f5
--- /dev/null
+++ b/python/testData/copyPaste/multiLine/IndentInnerFunction2.after.py
@@ -0,0 +1,9 @@
+def foo(self):
+    x = 1
+    y = 2
+
+    def foo(self):
+        x = 1
+        y = 2
+
+z = 3
\ No newline at end of file
diff --git a/python/testData/copyPaste/multiLine/IndentInnerFunction2.dst.py b/python/testData/copyPaste/multiLine/IndentInnerFunction2.dst.py
new file mode 100644
index 000000000000..e5ba0a209d8c
--- /dev/null
+++ b/python/testData/copyPaste/multiLine/IndentInnerFunction2.dst.py
@@ -0,0 +1,5 @@
+def foo(self):
+    x = 1
+    y = 2
+       <caret>
+z = 3
\ No newline at end of file
diff --git a/python/testData/copyPaste/multiLine/IndentInnerFunction2.src.py b/python/testData/copyPaste/multiLine/IndentInnerFunction2.src.py
new file mode 100644
index 000000000000..6d09083689a6
--- /dev/null
+++ b/python/testData/copyPaste/multiLine/IndentInnerFunction2.src.py
@@ -0,0 +1,4 @@
+<selection>def foo(self):
+    x = 1
+    y = 2
+</selection>
diff --git a/python/testSrc/com/jetbrains/python/PyCopyPasteTest.java b/python/testSrc/com/jetbrains/python/PyCopyPasteTest.java
index b6c67b4903a9..f8b2194aba3f 100644
--- a/python/testSrc/com/jetbrains/python/PyCopyPasteTest.java
+++ b/python/testSrc/com/jetbrains/python/PyCopyPasteTest.java
@@ -151,6 +151,10 @@ public class PyCopyPasteTest extends PyTestCase {
     doTestMultiLine();
   }
 
+  public void testIndentInnerFunction2() {  //PY-6886
+    doTestMultiLine();
+  }
+
   public void testIndentFunction() {
     doTestMultiLine();
   }