Soldiers launched an operation on Sunday night after the suspected separatist fighters were spotted in the mountainous Machil area in the north of Indian-administered Kashmir, the Indian army said on Monday.
Five AK-47 rifles, two grenade launchers, 70 grenades, two radio sets and a large quantity of ammunition were recovered from the bodies, an army spokesman said.
India's new army chief in Kashmir says the Pakistani army knows that separatists are crossing from Pakistan-administered Kashmir to the Indian side to join the fight against New Delhi's rule.
"I am quite certain that they are not unaware of this infiltration. But what active support they are giving to the infiltration, it is difficult for me to tell you," Lieutenant-General Dhillon said last week.
Peace process intact
But he said the infiltration was not expected to disrupt the 19-month-old peace process between India and Pakistan, or endanger a ceasefire in place since November 2003 along the heavily militarised border.
The Indian army said it had killed a total of 28 fighters last week who crossed from Pakistani Kashmir into the northern region of Indian Kashmir via mountain passes as high at 4850m.
New Delhi accuses Pakistan of arming and training Kashmiri guerrillas.
Meanwhile, Indian police detained at least 20 activists of Kashmir's separatist alliance on Monday after a protest against the killing of three teenagers by troops who mistook them for fighters, police and witnesses said.
Saturday night's shooting, in which a 15-year-old boy was also wounded, has fuelled anger among Kashmiri Muslims in Jammu and Kashmir, largely Hindu India's only Muslim-majority state.
Protesters demand Indian troops
'stop killing innocent Kashmiris'
"Stop killing and genocide of innocent Kashmiris," members of the All Parties Hurriyat (Freedom) Conference shouted before being arrested by police.
The protesters, led by separatist leader Javid Mir, carried banners that read: "We want freedom, stop state terrorism."
Police said the protesters had defied a ban on unauthorised public meetings in Srinagar.
The teenage boys were shot dead by soldiers who had mistaken them for separatists.
The army called the death of the teenagers a "regrettable incident", saying they did not stop when challenged.
"There has been an abrupt surge in rights violations by the Indian army in the state. Talks and genocide can't go together"
Mirwaiz Umar Farooq,
"The army requests all persons to stop when challenged and not run away as it leads to suspicion," an army statement said.
On Sunday, thousands of people - some of them carrying the victims' bodies - protested against the army near Kupwara town, northwest of Srinagar.
Kashmir's Chief Minister Mufti Mohammad Syed ordered an investigation into the incident.
Local leaders say New Delhi's forces continue to violate human rights with impunity.
"There has been an abrupt surge in rights violations by the Indian army in the state. Talks and genocide can't go together," Kashmir's leading newspaper, Greater Kashmir, quoted Hurriyat chief Mirwaiz Umar Farooq as saying.
Indian authorities deny a systematic violation of human rights in Kashmir and say they investigate all incidents and punish those found guilty.