Abstract In this paper, the terrain effect on parameter inversion performance of polarimetric synthetic aperture radar (PolSAR) and polarimetric SAR interferometry (PolInSAR) are analysed first. Based on the analysis of the terrain effect on single pixel processing, the terrain effect between adjacent pixels is addressed for both PolSAR and PolInSAR image pairs. Through the analysis, the terrain effect should be considered not only for the single pixel data calibration but also for the adjacent pixels of PolSAR and PolInSAR parameter inversion processing. Therefore, combining with the geometric model correction of sloped‐random volume over ground, the terrain‐compensated procedure is proposed for PolInSAR parameter inversion. The parameter inversion performance is improved effectively with terrain effect consideration. The effectiveness of the proposed method is investigated by the PolSARPro simulated dataset and the real Phased Array L‐Band Synthetic aperture Radar (PALSAR) dataset.