The killing takes the number of militants killed in the Muslim-majority region so far this year by Indian troops to 190, police official Vijay Kumar told Reuters.
Saiful Islam Mir, commonly known as Saifullah, chief of the Hizbul Mujahideen militant group, was shot dead in Kashmir's main city of Srinagar, Kumar said.
Saifullah took over the leadership of the group in the portion of Kashmir controlled by India after its previous chief there, Riyaz Naikoo, was killed in a gun battle with Indian troops in May.
The overall head of the Pakistan-based Hizbul Mujahideen is militant commander Syed Salahuddin, whom Washington placed on a list of global terrorists in 2017.
India and Pakistan both claim Kashmir in full but rule in part. New Delhi has long accused Pakistan of supporting an armed insurgency in the Himalayan territory, a charge Islamabad denies.
Last August, Indian Prime Minister Narendra Modi's government reorganised the state of Jammu and Kashmir, splitting it into federally-administered territories, promising better governance.
But the COVID-19 pandemic has slowed down development work, and members of Modi's Bharatiya Janata Party (BJP) have been increasingly targeted by militants.
Last week, three young BJP workers were shot dead by militants in southern Kashmir.