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Showing content from https://docs.microsoft.com/en-us/azure/developer/azure-developer-cli/use-terraform-for-azd below:

Use Terraform as an infrastructure as code tool for Azure Developer CLI

Azure Developer CLI (azd) supports multiple infrastructures as code (IaC) providers, including:

By default, azd assumes Bicep as the IaC provider. Refer to the Comparing Terraform and Bicep article for help deciding which IaC provider is best for your project.

Pre-requisites

Configure Terraform as the IaC provider

Open the azure.yaml file found in the root of your project and make sure you have the following lines to override the default, which is Bicep:
```
infra:
  provider: terraform
```
Add all your .tf files to the infra directory found in the root of your project.
Run azd up.

azd pipeline config for Terraform

Terraform stores state about your managed infrastructure and configuration. Because of this state file, you need to enable remote state before you run azd pipeline config to set up your deployment pipeline in GitHub.

By default, azd assumes the use of local state file. If you ran azd up before enabling remote state, you need to run azd down and switch to remote state file.

Local vs remote state

Terraform uses persisted state data to keep track of the resources it manages.

Scenarios for enabling remote state:

To allow shared access to the state data, and allow multiple people work together on that collection of infrastructure resources
To avoid exposing sensitive information included in state file
To decrease the chance of inadvertent deletion because of storing state locally

Enable remote state

Make sure you configure a remote state storage account.

Add a new file called provider.conf.json in the infra folder.

{
    "storage_account_name": "${RS_STORAGE_ACCOUNT}",
    "container_name": "${RS_CONTAINER_NAME}",
    "key": "azd/azdremotetest.tfstate",
    "resource_group_name": "${RS_RESOURCE_GROUP}"
}

Update provider.tf found in the infra folder to set the backend to be remote

# Configure the Azure Provider
terraform {
  required_version = ">= 1.1.7, < 2.0.0"
  backend "azurerm" {
  }

Run azd env set <key> <value> to add configuration in the .env file. For example:

azd env set RS_STORAGE_ACCOUNT your_storage_account_name
azd env set RS_CONTAINER_NAME your_terraform_container_name
azd env set RS_RESOURCE_GROUP your_storage_account_resource_group

Run the next azd command as per your usual workflow. When remote state is detected, azd initializes Terraform with the configured backend configuration.
To share the environment with teammates, make sure they run azd env refresh -e <environmentName> to refresh environment settings in the local system, and perform Step 4 to add configuration in the .env file.