I've followed the advice to turn off "use-theme-colors" and also set a custom background color in my embedded gedit terminal. But somehow, the palette setting is ignored and colors show as only black and white. As usual, a picture is worth a thousand words:
Best Answer
Here is the solution to it:
Make gedit embedded terminal colours the same as the default terminal
Make sure you also read the very last post, as only after applying that I had my problem completely resolved.