An example method for to inter-pod traffic redirection and handling in a multi-pod network environment is provided and includes receiving a packet with an overlay header outgoing from a first pod, identifying the packet as redirected based on a source address in the overlay header indicating a second pod and a destination address in the overlay header indicating a third pod, the first pod being distinct from the second pod and the third pod, setting a redirection bit in the overlay header tagging the packet as redirected, and transmitting the packet to the third pod.