Two soldiers and five suspected rebels were killed in a fierce gun battle in Indian-administered Kashmir near the existing border with Pakistan.
Police and soldiers cordoned off a village in northern Kupwara district, 90km away from the main city of Srinagar, after they got a tip that fighters were hiding in the area, said army spokesman Colonel Nitin Joshi on Saturday.
The 16-hour firefight began on Friday when government forces zeroed in on an abandoned house and the fighters who were holed up inside opened fire.
Another two soldiers were wounded and taken to a military hospital, according to police.
The incident took place near the Line of Control, an official border that divides the Kashmir region into two parts, one administered by India and the other by Pakistan.
Kashmir has been divided between the nuclear-armed South Asian rivals since the end of British colonial rule in 1947.
Both countries administer parts of the Himalayan territory separately but each claim it in full.
India accuses Pakistan of training and arming rebel fighters, and infiltrating them across the Line of Control. Pakistan denies those allegations.
Since 1989, several rebel groups have fought an estimated half a million Indian forces deployed in the region for independence or a merger of the territory with Pakistan.
The fighting has killed tens of thousands, mostly civilians.