The ceasefire violation took place at Jammu and Kashmir's Samba.
Four Pakistani soldiers were killed in retaliation after an Indian jawan was shot dead in the Samba district, 41 km from Jammu.
Pakistani Rangers who guard the border in Kashmir fired on a group of Indian soldiers on patrol, the second ceasefire violation in 24 hours. A jawan from the Border Security Force died.
Later in the evening, Pakistan summoned Indian Deputy High Commissioner to register protest about the deaths.
The deceased man was identified as Constable Sri Ram Gowria, reported news agency Press Trust of India. Another jawan suffered minor injuries, reports said.
The Indian retaliation came when Union Home Minister Rajnath Singh - after being briefed about the death - asked the BSF to give a fitting reply to the Rangers. An official statement said, "The Home Minister asked the DG, BSF to provide a suitable and appropriate reply for any such unprovoked firing".
In the evening, India returned fire and four Pakistanis were killed. India stopped firing when the Rangers raised a white flag, requesting time to remove the bodies.
In its official communique, Pakistan said it had summoned the Indian envoy to lodge strong protest over the "Shahadat of two personnel of Pakistani Rangers".
Last night, Defence Minister Manohar Parrikar said the Indian army would retaliate with "double the force" if Pakistan opened fire across the border. His comments came as tension between the two countries sharply escalated.
Cross-border violence has, in recent months, been the worst in over a decade. In October, at least 20 civilians were killed on both sides.
India summoned Pakistani High Commissioner Abdul Basit earlier this week to protest against the possibility of 26/11 mastermind Zakiur-Rahman Lakhvi walking free.
Lakhvi, who was arrested in 2009 for orchestrating the Mumbai attacks, was granted bail by a Pakistani court on December 18, drawing strong condemnation from New Delhi. He, however, is still in jail following arrest in another case. Pakistan has said it will appeal against his bail in the Supreme Court.