Farooq Naiku (37) and Mohammed Talukdar (32) were nabbed from a guest house in south Mumbai with fake currency notes on January 16, Joint Commissioner of Police (Crime) Himanshu Roy said.
The duo was produced before a court the next day and remanded in police custody till January 23.
During interrogation, it was revealed that Farooq was an active member of PoK-based terror group Hizbul-Mujahideen and operating mainly in Jammu and Kashmir, Roy said.
Farooq, a resident of Baramula in the border state, has been staying in Navi Mumbai for last one-and-a-half year posing as a dry fruits trader.
Farooq and Mohammed were actively involved in fake currency circulation and narcotics trade. According to police, Farooq was an expert in photography, computer operations and other communication modes. He has allegedly photographed several vital installations in Jammu and Kashmir.
Farooq has also gone to Pakistan via Wagah border on several occasions since 2001. Officially, he has crossed the Indo-Pak border three times. He has been in contact with handlers of Hizbul Mujahideen, police said.