diff --git a/README.md b/README.md
index 38faa05..fc696cc 100644
--- a/README.md
+++ b/README.md
@@ -251,10 +251,24 @@ The action supports the following inputs:
    for available range specifications). Examples are: `"<1.2.0"`, `"~1.1.0"`, `"1.1.7"` (all three installing
    the latest available `1.1` version). Prerelease versions can be specified and a range will stay within the
    given tag such as `beta` or `rc`. If no version is given, it will default to `latest`.
+- `terraform_version_file` - (optional) The path to a file containing terraform version. Supported file types are `.terraform-version` and `.tool-versions`. See more details in [about version-file](#Terraform-version-file).
 - `terraform_wrapper` - (optional) Whether to install a wrapper to wrap subsequent calls of
    the `terraform` binary and expose its STDOUT, STDERR, and exit code as outputs
    named `stdout`, `stderr`, and `exitcode` respectively. Defaults to `true`.
 
+### Terraform version file
+
+If the `terraform_version_file` input is specified, the action will extract the version from the file and install it.
+
+Supported files are `.terraform-version` and `.tool-versions`.
+In `.terraform-version` file, the version should be specified as explainied in the `terraform_version` input.
+In `.tool-versions` file, terraform version should be preceded by the terraform keyword (e.g., `terraform 1.13.0`).
+The `.tool-versions` file supports version specifications in accordance with Semantic Versioning ([semver](https://semver.org/)) and [Semver Ranges](https://www.npmjs.com/package/semver#ranges).
+
+If both `terraform_version` and `terraform_version_file` inputs are provided, the `terraform_version` input will be used.
+
+If the file contains multiple versions, only the first one will be recognized.
+
 ## Outputs
 
 This action does not configure any outputs directly. However, when you set the `terraform_wrapper` input