The ambush on army patrol took place in Machhil sector of Kashmir, following which the Indian army vowed heavy "retribution".
"A counter-infiltration patrol party of Indian army was ambushed by terrorists ahead of the fencing along LoC in forest belt in Machhil sector in Kupwara district today," a senior Army officer said.
Three soldiers were killed in the attack, he said, adding the body of one of them was mutilated.
A Defence spokesman said heavy cross-Line of Control shelling was going on at four places in Machhil sector from 3.30 pm.
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"Around 1530 hour, heavy cross-LoC shelling has started from both sides at Dana Machhil, Ashni, Ringsar and Ringsar Payeen in Machhil sector of Kupwara district," he said.
He did not give any further details.
This is the second such incident of mutilation of the body of an Indian soldier in the same sector since October 28.
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The three slain soldiers were : 25-year-old Prabhu Singh of Khir Jamkhas village in Shergarh tehsil of Rajasthan, 31- year-old K Kushwah of Daddupur, Ghazipur in Uttar Pradesh and 25-year-old Shashank K Singh of Nasirudinpur in Mohamadabad tehsil of Ghazipur in Uttar Pradesh.
Body of Prabhu Singh was mutilated, army sources said.