diff --git a/vault/capabilities.go b/vault/capabilities.go
index bbde54c8f4..795a150f91 100644
--- a/vault/capabilities.go
+++ b/vault/capabilities.go
@@ -37,6 +37,19 @@ func (c *Core) Capabilities(token, path string) ([]string, error) {
 		policies = append(policies, policy)
 	}
 
+	_, derivedPolicies, err := c.fetchEntityAndDerivedPolicies(te.EntityID)
+	if err != nil {
+		return nil, err
+	}
+
+	for _, item := range derivedPolicies {
+		policy, err := c.policyStore.GetPolicy(item, PolicyTypeToken)
+		if err != nil {
+			return nil, err
+		}
+		policies = append(policies, policy)
+	}
+
 	if len(policies) == 0 {
 		return []string{DenyCapability}, nil
 	}
diff --git a/vault/capabilities_test.go b/vault/capabilities_test.go
index 19bd404262..dbe0103fa2 100644
--- a/vault/capabilities_test.go
+++ b/vault/capabilities_test.go
@@ -2,9 +2,118 @@ package vault
 
 import (
 	"reflect"
+	"sort"
 	"testing"
+
+	"github.com/hashicorp/vault/logical"
 )
 
+func TestCapabilities_DerivedPolicies(t *testing.T) {
+	var resp *logical.Response
+	var err error
+
+	i, _, c := testIdentityStoreWithGithubAuth(t)
+
+	policy1 := `
+name = "policy1"
+path "secret/sample" {
+	capabilities = ["update", "create", "sudo"]
+}
+`
+	policy2 := `
+name = "policy2"
+path "secret/sample" {
+	capabilities = ["read", "delete"]
+}
+`
+
+	policy3 := `
+name = "policy3"
+path "secret/sample" {
+	capabilities = ["list", "list"]
+}
+`
+	// Create the above policies
+	policy, _ := ParseACLPolicy(policy1)
+	err = c.policyStore.SetPolicy(policy)
+	if err != nil {
+		t.Fatalf("err: %v", err)
+	}
+
+	policy, _ = ParseACLPolicy(policy2)
+	err = c.policyStore.SetPolicy(policy)
+	if err != nil {
+		t.Fatalf("err: %v", err)
+	}
+
+	policy, _ = ParseACLPolicy(policy3)
+	err = c.policyStore.SetPolicy(policy)
+	if err != nil {
+		t.Fatalf("err: %v", err)
+	}
+
+	// Create an entity and assign policy1 to it
+	entityReq := &logical.Request{
+		Path:      "entity",
+		Operation: logical.UpdateOperation,
+		Data: map[string]interface{}{
+			"policies": "policy1",
+		},
+	}
+	resp, err = i.HandleRequest(entityReq)
+	if err != nil || (resp != nil && resp.IsError()) {
+		t.Fatalf("bad: resp: %#v\nerr: %#v\n", resp, err)
+	}
+	entityID := resp.Data["id"].(string)
+
+	// Create a token for the entity and assign policy2 on the token
+	ent := &TokenEntry{
+		ID:       "capabilitiestoken",
+		Path:     "secret/sample",
+		Policies: []string{"policy2"},
+		EntityID: entityID,
+	}
+	if err := c.tokenStore.create(ent); err != nil {
+		t.Fatalf("err: %v", err)
+	}
+
+	actual, err := c.Capabilities("capabilitiestoken", "secret/sample")
+	if err != nil {
+		t.Fatalf("err: %v", err)
+	}
+	expected := []string{"create", "read", "sudo", "delete", "update"}
+	sort.Strings(actual)
+	sort.Strings(expected)
+	if !reflect.DeepEqual(actual, expected) {
+		t.Fatalf("bad: got\n%#v\nexpected\n%#v\n", actual, expected)
+	}
+
+	// Create a group and add the above created entity to it
+	groupReq := &logical.Request{
+		Path:      "group",
+		Operation: logical.UpdateOperation,
+		Data: map[string]interface{}{
+			"member_entity_ids": []string{entityID},
+			"policies":          "policy3",
+		},
+	}
+	resp, err = i.HandleRequest(groupReq)
+	if err != nil || (resp != nil && resp.IsError()) {
+		t.Fatalf("bad: resp: %#v\nerr: %#v\n", resp, err)
+	}
+
+	actual, err = c.Capabilities("capabilitiestoken", "secret/sample")
+	if err != nil {
+		t.Fatalf("err: %v", err)
+	}
+	expected = []string{"create", "read", "sudo", "delete", "update", "list"}
+	sort.Strings(actual)
+	sort.Strings(expected)
+	if !reflect.DeepEqual(actual, expected) {
+		t.Fatalf("bad: got\n%#v\nexpected\n%#v\n", actual, expected)
+	}
+}
+
 func TestCapabilities(t *testing.T) {
 	c, _, token := TestCoreUnsealed(t)
 
diff --git a/vault/core.go b/vault/core.go
index 3a155f16e2..6ab857dd0c 100644
--- a/vault/core.go
+++ b/vault/core.go
@@ -661,6 +661,57 @@ func (c *Core) LookupToken(token string) (*TokenEntry, error) {
 	return c.tokenStore.Lookup(token)
 }
 
+// fetchEntityAndDerivedPolicies returns the entity object for the given entity
+// ID. If the entity is merged into a different entity object, the entity into
+// which the given entity ID is merged into will be returned. This function
+// also returns the cumulative list of policies that the entity is entitled to.
+// This list includes the policies from the entity itself and from all the
+// groups in which the given entity ID is a member of.
+func (c *Core) fetchEntityAndDerivedPolicies(entityID string) (*identity.Entity, []string, error) {
+	if entityID == "" {
+		return nil, nil, nil
+	}
+
+	//c.logger.Debug("core: entity set on the token", "entity_id", te.EntityID)
+
+	// Fetch the entity
+	entity, err := c.identityStore.MemDBEntityByID(entityID, false)
+	if err != nil {
+		c.logger.Error("core: failed to lookup entity using its ID", "error", err)
+		return nil, nil, err
+	}
+
+	if entity == nil {
+		// If there was no corresponding entity object found, it is
+		// possible that the entity got merged into another entity. Try
+		// finding entity based on the merged entity index.
+		entity, err = c.identityStore.MemDBEntityByMergedEntityID(entityID, false)
+		if err != nil {
+			c.logger.Error("core: failed to lookup entity in merged entity ID index", "error", err)
+			return nil, nil, err
+		}
+	}
+
+	var policies []string
+	if entity != nil {
+		//c.logger.Debug("core: entity successfully fetched; adding entity policies to token's policies to create ACL")
+
+		// Attach the policies on the entity
+		policies = append(policies, entity.Policies...)
+
+		groupPolicies, err := c.identityStore.groupPoliciesByEntityID(entity.ID)
+		if err != nil {
+			c.logger.Error("core: failed to fetch group policies", "error", err)
+			return nil, nil, err
+		}
+
+		// Attach the policies from all the groups
+		policies = append(policies, groupPolicies...)
+	}
+
+	return entity, policies, err
+}
+
 func (c *Core) fetchACLTokenEntryAndEntity(clientToken string) (*ACL, *TokenEntry, *identity.Entity, error) {
 	defer metrics.MeasureSince([]string{"core", "fetch_acl_and_token"}, time.Now())
 
@@ -688,47 +739,13 @@ func (c *Core) fetchACLTokenEntryAndEntity(clientToken string) (*ACL, *TokenEntr
 
 	tokenPolicies := te.Policies
 
-	var entity *identity.Entity
-
-	// Append the policies of the entity to those on the tokens and create ACL
-	// off of the combined list.
-	if te.EntityID != "" {
-		//c.logger.Debug("core: entity set on the token", "entity_id", te.EntityID)
-		// Fetch entity for the entity ID in the token entry
-		entity, err = c.identityStore.MemDBEntityByID(te.EntityID, false)
-		if err != nil {
-			c.logger.Error("core: failed to lookup entity using its ID", "error", err)
-			return nil, nil, nil, ErrInternalError
-		}
-
-		if entity == nil {
-			// If there was no corresponding entity object found, it is
-			// possible that the entity got merged into another entity. Try
-			// finding entity based on the merged entity index.
-			entity, err = c.identityStore.MemDBEntityByMergedEntityID(te.EntityID, false)
-			if err != nil {
-				c.logger.Error("core: failed to lookup entity in merged entity ID index", "error", err)
-				return nil, nil, nil, ErrInternalError
-			}
-		}
-
-		if entity != nil {
-			//c.logger.Debug("core: entity successfully fetched; adding entity policies to token's policies to create ACL")
-			// Attach the policies on the entity to the policies tied to the token
-			tokenPolicies = append(tokenPolicies, entity.Policies...)
-
-			groupPolicies, err := c.identityStore.groupPoliciesByEntityID(entity.ID)
-			if err != nil {
-				c.logger.Error("core: failed to fetch group policies", "error", err)
-				return nil, nil, nil, ErrInternalError
-			}
-
-			// Attach the policies from all the groups to which this entity ID
-			// belongs to
-			tokenPolicies = append(tokenPolicies, groupPolicies...)
-		}
+	entity, derivedPolicies, err := c.fetchEntityAndDerivedPolicies(te.EntityID)
+	if err != nil {
+		return nil, nil, nil, ErrInternalError
 	}
 
+	tokenPolicies = append(tokenPolicies, derivedPolicies...)
+
 	// Construct the corresponding ACL object
 	acl, err := c.policyStore.ACL(tokenPolicies...)
 	if err != nil {
diff --git a/website/source/api/system/capabilities-accessor.html.md b/website/source/api/system/capabilities-accessor.html.md
index 06a2bf3504..011850ce72 100644
--- a/website/source/api/system/capabilities-accessor.html.md
+++ b/website/source/api/system/capabilities-accessor.html.md
@@ -9,8 +9,11 @@ description: |-
 
 # `/sys/capabilities-accessor`
 
-The `/sys/capabilities-accessor` endpoint is used to fetch the capabilities of a
-token associated with an accessor.
+The `/sys/capabilities-accessor` endpoint is used to fetch the capabilities of
+a token associated with an accessor. The capabilities returned will be derived
+from the policies that are on the token, and from the policies to which token
+is entitled to through the entity and entity's group memberships.
+
 
 ## Query Token Accessor Capabilities
 
diff --git a/website/source/api/system/capabilities-self.html.md b/website/source/api/system/capabilities-self.html.md
index 4adfb96cd0..6957ea9efd 100644
--- a/website/source/api/system/capabilities-self.html.md
+++ b/website/source/api/system/capabilities-self.html.md
@@ -9,8 +9,10 @@ description: |-
 
 # `/sys/capabilities-self`
 
-The `/sys/capabilities-self` endpoint is used to fetch the capabilities of a the
-supplied token.
+The `/sys/capabilities-self` endpoint is used to fetch the capabilities of a
+the supplied token.  The capabilities returned will be derived from the
+policies that are on the token, and from the policies to which token is
+entitled to through the entity and entity's group memberships.
 
 ## Query Self Capabilities
 
diff --git a/website/source/api/system/capabilities.html.md b/website/source/api/system/capabilities.html.md
index a8ef2c4e5d..c2449b03c0 100644
--- a/website/source/api/system/capabilities.html.md
+++ b/website/source/api/system/capabilities.html.md
@@ -9,8 +9,10 @@ description: |-
 
 # `/sys/capabilities`
 
-The `/sys/capabilities` endpoint is used to fetch the capabilities of a token on
-a given path.
+The `/sys/capabilities` endpoint is used to fetch the capabilities of a token
+on a given path. The capabilities returned will be derived from the policies
+that are on the token, and from the policies to which token is entitled to
+through the entity and entity's group memberships.
 
 ## Query Token Capabilities