A system for multicast packet management in a first switch in an overlay tunnel fabric is provided. The system can operate the first switch as part of a virtual switch in conjunction with a second switch of the fabric. The virtual switch can operate as a gateway for the fabric. During operation, the system can receive a join request for a multicast group. The system can then determine whether to forward the join request to the second switch based on a type of a first ingress connection of the join request. Upon receiving a data packet for the multicast group, the system can determine how to forward the data packet based on respective types of a second ingress connection and an egress connection of the data packet. The type of a respective connection can indicate whether the connection includes an overlay tunnel.