The encounter broke out on Tuesday evening, hours after two terrorists who tried to infiltrate into India were shot dead.
The encounter is going on in Kulgam's Tanimarg.
This comes a day after twenty-eight tourists died in one of the worst terror attacks on civilians when terrorists identified them as non-Muslims and gunned them down in Baisaran meadows, a popular destination in Pahalgam.
The terrorists, who were apparently in camouflage, reportedly asked the victims to chant Islamic verse, pull down their pants to check circumcision in a bid to confirm their Hindu identities before gunning them down. Two among the dead were non-Muslim foreigners.
Defence Minister Rajnath Singh has already issued a warning that there will be retaliation, which will be appropriate and swift.
He said those responsible for the cowardly terrorist attack on 'innocent citizens' in Jammu and Kashmir will soon get a befitting reply to their nefarious acts on Indian soil.
Prime Minister Narendra Modi chaired a crucial meeting of the Cabinet Committee on Security (CCS) on Tuesday evening to discuss the shocking terror attack.