Example methods and systems for logical network packet handling are described. In one example, a physical network interface controller (PNIC) may receive an ingress encapsulated packet associated with a packet flow via a physical network. The ingress encapsulated packet may include an outer header and an inner packet that is destined for a virtualized computing instance. The ingress encapsulated packet may be steered towards a processing pipeline for processing to generate a processed packet. The processing pipeline may include (a) retrieving a logical network policy associated with the packet flow from a datastore on the PNIC; and (b) performing decapsulation to remove the outer header and one or more actions on the inner packet according to the logical network policy. The processed packet may be forwarded towards the virtualized computing instance via a virtual function supported by the PNIC or a physical network connected to the PNIC.