Three army personnel, including an officer, were injured in the operation and airlifted to Army's 92 base hospital in Srinagar. Their condition was stated to be stable, a police official said.
Director General of Police S P Vaid told PTI that security forces have achieved a "major success" by gunning down the four militants.
"However, it is unfortunate that two soldiers were martyred and son of the house owner got caught in the cross-fire and succumbed to injuries," he said.
"There has been a series of evidences and it is now no longer a secret that the entire terrorism on Indian soil, particularly in Jammu and Kashmir, is being promoted, perpetuated and sponsored by Islamabad," he said.
The minister lauded the forces for working under difficult circumstances.
"They (forces) are operating under most difficult circumstances and have beyond doubt proven themselves as one of the best forces in the world," he said.
Giving details of the encounter, official sources said that acting on a tip-off of Jammu and Kashmir Police, a cordon was thrown around Nagabal Village in Frisal, about 70 kms south of Srinagar by the army, police and para-military forces at around 4.30 AM.
A repeated check of all the houses yielded no success but the police personnel accompanying the raiding party insisted on rechecking a house.
The personnel from One Rashtriya Rifles, which forms part of the Victor Force counter-insurgency grid of army in South Kashmir, and Special Operation Group of State police again carried out a search inside the house and found a false ceiling where the militants were hiding.
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