The Shamsbari forest, where the fighting is taking place, is about 120km north of Indian Kashmir's main city of Srinagar.
Pakistan and India agreed to a 2003 ceasefire along the Line of Control and have since held slow-moving peace talks.
However, those negotiations came to a halt after co-ordinated attacks on the Indian city of Mumbai that killed more than 170 people last November.
New Delhi has blamed the Pakistan-based Lashkar-e-Taiba for the attack, but also accused "official agencies" of involvement.
India and Pakistan have fought two of their three wars over the predominantly Muslim Himalayan region, which is claimed in full by both countries.
India frequently accuses Pakistan of arming, training and sending separatist fighters into India-controlled Kashmir, a charge Islamabad denies.
Analysts say there are about one dozen armed groups operating on both sides of the Line of Control, but only a handful are active.
More than 40,000 people have been killed and over 200,000 displaced in a 17-year-old battle for autonomy in India-ruled Kashmir.
On Saturday, troops from the two neighbours exchanged fire along a different part of the Line of Control.
Islamabad accused Indian forces of "unprovoked firing" and said it had lodged a protest with New Delhi. But an Indian army official blamed Pakistani troops for starting the firing, and said one Indian soldier had been wounded.
The frontier with Pakistan is one of the most militarised in the world.