A number of other states have been put on high alert after the attack.
After nearly 12 hours of a raging gun-battle, a group of three terrorists were shot dead by the Punjab police in the town of Dinanagar, near the border with Pakistan. Four policemen and three civilians died in the terror attack, which began just before dawn.
The three terrorists- suspected to be from Pakistan - were wearing army fatigues when they tried unsuccessfully to grab a tempo on a major highway in the region of Gurdaspur. A roadside food stall owner was killed in the firing.
The terrorists then opened fire on a bus heading towards the state capital of Chandigarh; six passengers were injured.
Next, the terrorists shot at a white Maruti 800. The driver was injured; the attackers left in his car and pulled up at a police station complex at about 5.30 am, automatic weapons blazing.
The Maruti was abandoned next to the police station with its windshield peppered with bullet holes, and broken glass and bullet casings on the passenger seat.
Five bombs were found on a railway track nearby, in a possible sign of an attempted coordinated attack.
The assault only ended at around 5 pm when security forces finally entered the police station where the terrorists had been holed up.
Home Minister Rajnath Singh said he had ordered increased security on the border with Pakistan, which condemned the assault in a statement.
A number of other states have been put on high alert.
"This militancy is a national problem, not a state problem, so it needs to be tackled with a national policy," said Punjab Chief Minister Prakash Singh Badal.