The inspector general of police Danish Rana said the two men had abandoned the force to join the banned Lashkar-e-Taiba militant group.
“We were on hot pursuit against them. Today we eliminated them in a joint operation with the army,” Rana told AFP.
Both were said to be former rebels who had been recruited as Special Police Officers (SPOs), one in 1999 and the other in 2006.
SPOs are mostly former rebels who have surrendered or served time in prison, and are mostly used in counter-insurgency work.
They are paid less than regular officers and there have been previous cases of them deserting the force — earlier this year an SPO guarding the residence of a local minister deserted his post to join the rebel group Hizbul Mujahideen.
Rana said the brief gun battle took place in the mountainous area of Doda, 175 kilometres (110 miles) southeast of Indian-held Kashmir’s main city of Srinagar.
For decades, several rebel groups have fought hundreds of thousands of Indian forces deployed in the region, for independence or merger of the Himalayan territory with Pakistan in a conflict that has killed tens of thousands mostly civilians.