A charged crowd of around 5,000 people including leaders of militant organisation attended the funeral in Rawalakot in Pakistan-occupied Kashmir (PoK) and chanted slogans against India.
Officials described the return of Waheed Noor Khan's body as the first time such an exchange had happened.
"It has happened for the first time that India has handed over dead body of a militant to Pakistan," Hamid Mughul, a senior administration official in PoK, told AFP.
The disputed Kashmir region has been divided between India and Pakistan since the two countries gained independence in 1947. Both claim it in its entirety.
Khan was acquitted of three charges in Jammu and Kashmir but was killed in a bomb blast on June 20 in the town of Sopore while being taken to court for the fourth and final case against him.
Syed Salahudeen, chief of the United Jihad Council, an alliance of various militant groups fighting against Indian troops said Khan had crossed the border to wage jihad against India.
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