A five-member counterinsurgency team entered the home in the northwestern Handwara area late Saturday and “successfully extricated the civilians”, an Indian army statement said.
The government forces came under heavy gunfire from the house, and in the ensuing firefight two rebels and all counterinsurgency team members died, it said.
It did not specify how many civilians were rescued. No rebel group immediately commented and there was no independent confirmation of the hostage-taking.
A police officer said an army colonel and a major, along with a police officer and two other soldiers tried to storm the hideout when they were gunned down by the rebels. The officer spoke on condition of anonymity in keeping with department policy.
The officer said special forces reinforcements were called in and they shot dead two rebels but two others likely escaped.
Meanwhile, at least eight civilians, including three young children and a teenage boy, were wounded on Sunday in a blast caused by an explosive device just a few kilometres from Saturday’s gun battle. Police were investigating the cause of the explosion.
India has stepped up its counterinsurgency operations across Kashmir in recent months despite a lockdown to combat the coronavirus pandemic. Rebels fighting Indian rule have not ceased their attacks on security forces and alleged informants.
There has also been almost daily fighting over the last several months along the rugged and mountainous highly militarised frontier that divides Kashmir between India and Pakistan.
On Friday, two Indian soldiers were killed in border skirmishes. On Wednesday, a Pakistani soldier and three civilians on both sides of Kashmir were killed in another bout of fighting.
India and Pakistan claim divided Kashmir 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 rule.
Rebels have been fighting Indian control since 1989. India accuses Pakistan of arming and training the fighters, a charge Pakistan denies.
Nearly 70,000 people have been killed in the uprising and the ensuing Indian military crackdown.