A joint team of police, Army and CRPF launched a cordon and search operation in Khudwani area of Kulgam district after getting information about Hizbul militants there, a police spokesman said.
He said the forces asked the militants to surrender.
"One terrorist identified as Arif Ahmad Sofi surrendered before police. The other two terrorists tried to escape from the spot while firing indiscriminately. The fire was retaliated and during the ensuing encounter both were neutralised," the spokesman added.
"The slain terrorists were involved in the killing of the sarpanch of Hawoora village and snatching weapons from guard post Samnoo.
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"Dawood Ahmad Allaie was also involved in instigating youth to pelt stones, the firing incident on Yaripora Police Station and bank robbery at Arwani branch of J&K Bank," the spokesman said.
An AK-47 rifle, along with two of its magazines and 63 rounds, and an INSAS rifle, with a magazine and 60 rounds, were seized from the encounter site.
A pistol, along with a magazine and two rounds, was also seized, he said.