A packet forwarding method and a network device are provided, and the method is applied to the network device. The network device includes a first virtual routing and forwarding (VRF) table and a second VRF table. The method includes: the network device receives a first packet. If the first packet carries tunnel attribute information, the network device forwards the first packet based on the first VRF table. The first VRF table includes one or more local routes, and next-hop outbound interfaces of the one or more local routes are all local outbound interfaces. The network device forwards the first packet based on the first VRF table, so that a packet from a tunnel may be forwarded to a local virtual machine for processing and may not be forwarded to another tunnel endpoint device, to avoid a routing loop during packet forwarding.