The five were killed during fierce overnight fighting which also injured six policemen, a police spokesman said on Sunday.
The raid started late on Saturday when two or three heavily-armed fighters forced their way into the camp on the shores of the Dal Lake in Srinagar.
"Two of the militants who had stormed the camp have been shot dead," a police officer reported.
He said the shooting had stopped briefly after the death of the first rebel early on Sunday, but resumed with a second separatist hurling grenades and putting down heavy fire.
"He was also killed around 0230 GMT by sharpshooters," the officer said, adding the camp was now being searched for a possible third rebel.
All the roads leading to the camp have been sealed off, police said, adding four of the six injured, including the commanding officer of the camp, were in serious condition.
The raid was the third on India's Central Reserve Police Force in Srinagar since 27 July when an attack on a similar island camp left five police and two separatists dead.
Dal Lake in Srinagar is Kashmir's
main tourist attraction
On 4 August, nine policemen and a separatist were killed.
The al-Mansoorain rebel group claimed responsibility for all three attacks.
Dal Lake is Kashmir's main tourist attraction with many travellers staying in houseboats on the lake.
Houseboat owners said the night-long clash sparked panic among tourists.
The attack comes days after Indian and Pakistani foreign ministers held their first meeting in three years to resolve outstanding issues, including the dispute over Kashmir.
Indian Kashmir is in the grip of an internal uprising that has claimed tens of thousands of lives since 1989.
Also on Sunday, unknown armed men shot and killed a Muslim cleric in Pakistan's eastern city of Lahore, relatives and police said.
They said assailants riding on motorcycles attacked Maulana Ibrahim Salfi, 44, leader of Jamaatul Dawat (party of preachers), at his residence after he had returned home from his morning prayers.
Indian and Pakistani ministers
recently held talks on Kashmir
"He just stepped in when the door-bell was buzzed. As soon as he opened the door, they started firing," Yahya Mujahid, the party's spokesman said.
Senior police officer Farhan Baig said the cleric died instantly as he was shot in the head and neck.
Baig said two motorcyclists carried out the attack, although several of Salfi's relatives said they counted at least six assailants.
No one has claimed responsibility for the attack and no arrests have been made. But Mujahid blamed the Indian spy agency RAW for the murder.
"Since we are working in Kashmir, it is RAW which has done this through its agents," he said.