Indian troops laid a siege around a southern village in Qazigund area overnight on a tip that militants were hiding there, police said. Fierce gunbattle erupted early Saturday, and hours later, five local Kashmiri rebels were killed.
The slain rebels belonged to the region's largest rebel group Hizbul Mujahideen, police said.
The fighting sparked anti-India protests and clashes as hundreds of residents tried to march to the site of the battle in solidarity with the militants. Government forces fired warning shots, shotgun pellets and tear gas at the stone-throwing protesters, injuring at least six people.
Nuclear-armed India and Pakistan each administer part of Kashmir, but both claim it in its entirety.
Most Kashmiris support the rebel cause that the territory be united either under Pakistani rule or as an independent country while also participating in civilian street protests against Indian control. In recent years, mainly young Kashmiris have displayed open solidarity with rebels and sought to protect them by engaging troops in street clashes during military operations.
Rebels have been fighting Indian control since 1989. India accuses Pakistan of arming and training the rebels, a charge Pakistan denies.
Nearly 70,000 people have been killed in the uprising and the ensuing Indian military crackdown.