Security forces launched a cordon and search operation in Awneera area of Shopian in early hours after receiving information about the presence of terrorists there, a police spokesman said.
The Army had laid a checkpoint at Moolu Chitragam in Shopian in the early hours. A private vehicle jumped the checkpoint.
The bodies were retrieved from the site of the encounter and handed over to the legal heirs.
Police said as the forces were conducting searches, the militants fired at them, triggering an encounter in which two militants and their "active associate" were killed.
While the slain terrorists are yet to be identified, the encouinter is still underway.
The operation was launched following information about presence of militants there, a police official said.
While two victims were identified as Yawar Mushtaq and Shakeel Ahmed, both Hizbul Mujahideen (HM) militants from Shopian, the third was identified as a civilian, Ishtiyaq Ahmed Bhat.
The spokesman said according to the police records, the slain militants have affiliated with proscribed terror outfit JeM.
The identity of the injured and the political party he belonged to is yet to be known.
PM Modi was referring to the encounter of two militants by security forces in Shopian district of Jammu and Kashmir, today.
Security forces launched a cordon and search operation in Hindsitapur area of Shopian district in south Kashmir following specific information about the presence of militants.
The militant killed was identified as Ishfaq Ahmad Sofi alias Umar, a resident of Model Town-B in Sopore area of Baramulla district.
Arms and ammunition were recovered from the scene of the encounter, a police spokesman said.
This came on a day Jammu and Kashmir Governor Satya Pal Malik ordered a probe into attacks on political activists in the state since October last year.
The families of the boys in Shopian said that they had gone to a Sufi Shrine, Sharda Sharief, after which they went on a picnic in Rajouri.