Acid Ceramidase (aCDase) plays an important role in restricting virus replication in acute viral infections such as herpes simplex virus type 1 (HSV-1). However, function of aCDase in chronic viral infection is still unknown. Here, using the lymphocytic choriomeningitis virus (LCMV) Docile strain we show that aCDase deficiency correlates with downregulation of Programmed Death Ligand 1 (PD-L1) causing hyperactivation of CD8⁺ T cell which leads to immunopathological damage in mice. Mechanistically, aCDase modulates activation of Toll Like Receptors (TLR) at vesicular compartments and thereby accelerates induction of type I interferon (IFN-I). IFN-I then induces PD-L1 in blood and spleen and limits immunopathogenic CD8⁺ T cell responses. Depletion of CD8⁺ T cells, or transfer of IFN-I treated PD-L1 expressing macrophages rescued Asah1^-/- mice from fast death. In conclusion, we found that aCDase is an important modulator of innate immune activation and checkpoint control.