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India says one of two soldiers killed in an alleged cross-border attack by Pakistan troops in the disputed territory of Kashmir was beheaded.
Pakistan has rejected accusations that it killed any Indian soldiers or fired across the Line of Control (LoC) which divides Kashmir.
India called the attack "barbaric" and summoned Pakistan's top envoy in Delhi over the incident.
Claimed by both countries, Kashmir has been a flashpoint for over 60 years.
A statement from the Indian foreign ministry said the soldiers' bodies had been subjected to "barbaric and inhuman mutilation" which was "in contravention of all norms of international conduct".
India's chief military spokesman told the BBC one of the soldiers had been beheaded by the Pakistani army.
Troops searched the area afterwards but could not find the head, the spokesman said. India believes the Pakistanis took the head with them when they retreated.
The spokesman confirmed the body of the other soldier had been mutilated but would not give any further details.
The Pakistani foreign ministry says India's allegations are "baseless" and it is willing to have a UN investigation.
A Pakistani military official said Pakistan had verified the facts on the ground and found "nothing of the sort" had happened.
He denounced the Indian claim as "propaganda" to divert attention away from a clash on the LoC two days earlier.
Pakistan said one of its soldiers was killed on 6 January after an Indian incursion. India denies its soldiers crossed the line.
India says a patrol was attacked by Pakistani soldiers near the LoC on Tuesday. It says two soldiers were killed in the firefight near Mendhar, 220km (140 miles) north of the Indian city of Jammu.
The battle lasted about half an hour before "the intruders retreated back towards their side" of the LoC, an Indian statement said.
Defence Minister AK Antony told reporters that the "Pakistan army's action is highly objectionable and also the way they treated the body of the Indian soldier is inhuman".
Pakistan's high commissioner in Delhi was summoned to a meeting with the Indian foreign secretary.
Earlier, Indian Foreign Minister Salman Khurshid pledged a "proportionate" response to the attack.
He said Tuesday's incident was an "attempt to derail the dialogue" between the two countries.
Exchanges in the disputed area are not uncommon but rarely result in fatalities.
There has been a ceasefire in Kashmir since late 2003.
India suspended a peace process with Pakistan following attacks by Pakistan-based militants in Mumbai in 2008. Negotiations resumed in February last year.
Thousands of people have been killed in Indian-administered Kashmir since an armed revolt against Indian rule erupted in 1989.
Last month, India and Pakistan signed an agreement to ease visa restrictions on travel for some citizens.