One embodiment of the present invention provides a switch. The switch includes a gateway subgroup module, a tunnel management module, and a packet processor. The gateway subgroup module operates the switch in conjunction with a remote switch to form a gateway subgroup. The switch and the remote switch actively operate as tunnel gateways. The tunnel management module maintains a data structure indicating whether a tunnel source subnet is associated with the gateway subgroup. The packet processor decapsulates a tunnel-encapsulated packet in response to a tunnel source subnet of the tunnel-encapsulated packet being associated with the gateway subgroup.