"I expect all my commanders on the Line of Control to be aggressive and offensive in face of provocation and fire," said Gen. Bikram Singh, chief of Army Staff.
"No passivity is expected from them. Their response has to be measured and for effect," said Singh, who took over the top army job in May.
A report by the Times of India newspaper said Singh's statement is a sign that tensions remain high along the frontier after India accused the Pakistani army last week of "barbaric and inhuman mutilation" of the bodies of two Indian soldiers killed in the Kashmir region within the Himalayas.
Pakistan denies the accusations that members of its elite SSG commandos beheaded an Indian soldier and mutilated another soldier's body.
Singh said the army "reserved the right to retaliate at a time and place of its choosing,"
Despite the continuing high tension, senior officers including brigadiers from the two armies have been meeting the Chakkan-Da-Bagh crossing point in Poonch district, The Times report said.
Singh also said the incident wouldn't precipitate a clash with Pakistani troops, the first stage has been reached, the Times report said.
"Though the beheading has angered us at the strategic level, it was a tactical operation and we will respond at the tactical level now. ... We do not plan to up the ante. We will uphold the cease-fire as long as the adversary respects it but will retaliate if provoked," he said.
India and Pakistan agreed the cease-fire line in 2003 although Pakistan claims all the Kashmir region of India's Jammu and Kashmir state, which is around 60 per cent Muslim -- India's only Muslim majority state.
The Kashmir area was divided when the British colonial power quit the subcontinent in 1947, creating the two countries that went to war over the dispute for a year.
The two armies face each other across the Indian-made 340-mile Line of Control, a double-row fence including concertina up to 12 feet high.
It is electrified and protected by motion sensors, thermal imaging devices, lighting systems and alarms.
India maintains it has stopped much smuggling of arms from Pakistan into Kashmir for use by Muslim separatists.
Another brief war happened between the two nuclear-armed countries in 1965 and an armed confrontation in 1999, when Pakistani-backed forces infiltrated Indian territory in the Kargil area of Kashmir.
Last week's beheading was a warning to India to stand firm against Pakistan, the Hindu nationalist opposition party Bharatiya Janata Party said.
The governing Congress Party should place the facts before the international community so Islamabad can be "named and shamed," BJP leader Arun Jaitley said in a Press Trust of India report.
The Pakistani army rejected charges that it crossed the Line of Control and killed Indian soldiers, the state-run Associated Press of Pakistan reported last week.
Pakistan army's director general military operations, Maj. Gen. Ashfaq Nadeem told his Indian counterpart that Pakistan had "carried out ground verification and checked and found nothing of this sort happened as being alleged by India," the report said.
The report also accused Indian troops of a raid on a Pakistani post Jan. 6 in which a Pakistani soldier was killed. India has denied the accusation, saying its soldiers returned fire after first being shot at.