Harchanran Singh Bains, a Punjab state government spokesman, said two of the dead were militants. It was not immediately known if all of the other five were police.
Senior police officer Dinkar Gupta said the attackers, believed to have come from the Indian portion of Kashmir, hijacked a car and then fired at a bus station and entered a nearby police station near Gurdaspur, a border town in Punjab state.
Army and police reinforcements poured into the area and were exchanging gunfire with the rebels holed up in the barracks, he said.
Defense Minister Manohar Parrikar said army commandos had joined the police operations.
New Delhi Television news channel said three to four rebels carried out the attack near Gurdaspur, which is 450 kilometers (280 miles) north of New Delhi.
State-run All India Radio said that separately police had discovered five bombs on a railway track in the area, causing train services to be suspended.
Rebels have been fighting for an independent Kashmir or its merger with Pakistan since 1989.
However, Monday's attack came in the neighboring Punjab state, which witnessed militancy by Sikhs in the 1980s.
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