Police said the gun-battle took place late on Wednesday near a ceasefire line dividing the Himalayan region between the rivals.
"Security forces eliminated four terrorists near the Line of Control in Machil sector, while they were trying to infiltrate into our side," an Indian police spokesman said.
Machil lies in the district of Kupwara northwest of Srinagar, the summer capital of Indian-administered Kashmir.
Violence has soared in Kashmir in recent weeks, casting a cloud on tentative peace steps between India and Pakistan, which nearly went to war for a fourth time last year, over Kashmir.
Police say more than 171 people, mostly fighters, have been killed in separatist violence in the first two weeks of September.
India has long demanded that Pakistan should put a stop to Islamic fighters crossing into Indian-administered Kashmir. Pakistan denies the charges.