The encounter also claimed the life of one army personnel and a civilian during the exchange of gunfire.
On specific inputs about the presence of terrorists in the area, J&K police along with 55 Rashtriya Rifles unit of the Indian Army and CRPF launched a cordon and search operation in the village.
Army personnel, identified as Sandeep, succumbed to injuries at army's 92 base hospital in Srinagar. Sandeep was part of a team which was close to the encounter spot and was fired upon as they zeroed in on them.
During the operation, two army men and a civilian also received injuries who are now being treated at the hospital.
"As the Police and security forces were evacuating civilians from the neighbourhood area around the target house, the hiding terrorists fired indiscriminately. In the process, one Army soldier Sandeep attained martyrdom and one civilian Rayees Dar also lost his life," J&K police said in a statement.
The killing of Khalid, a top commander of Jaish, is also seen as a major success for the security agencies. Sources in the police say that Khalid was active in Kashmir for few years and was wanted in the 2017 suicide attack on a CRPF camp in Lethpora, Pulwama, that left five paramilitary personnel dead.
Police identified the other two local terrorists as Naseer Pandith, a resident of Kareemabad in Pulwama and Umar Mir of Shopian and said that the duo was involved in several terror crimes and killing of a policeman on the eve of EID last year.
Intense clashes were also witnessed around the encounter spot and police used tear smoke shells and pellets to disperse the protestors.
Meanwhile, three more terrorists were killed in another encounter between security forces and terrorists in south Kashmir’s Shopian district.
Two bodies have been recovered from the debris while the search for the third is going on.
Sources say all of them belong to Hizb-ul-Mujahideen outfit.
Incriminating material including ammunition were recovered from the encounter site, a police spokesman said.