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The attack in the region's summer capital, Srinagar, late Saturday was one of the deadliest this year and the first car bomb blast in four years.
Police have blamed the attack, which hit a police bus, on Muslim militants fighting to end Indian rule in the scenic Himalayan region.
"Whoever provides information about the militants involved in the blast will be given a reward of one million rupees (20,000 dollars)," a police spokesman said in Srinagar.
No militant group has claimed responsibility for the explosion, which was heard up to five kilometres (three miles) away.
It was the first major blast in the region this year after a lull in violence. According to official figures, the Muslim-majority region's insurgency has left more than 47,000 people dead since it began in 1989.
Indian police and paramilitary forces have tightened security in Srinagar since the blast.
Security personnel were seen frisking residents and searching cars for arms and explosives, an AFP reporter said, while troops were checking pedestrians' identity cards.
In southern Pulwama district, around 30 kilometers (18 miles) south of Srinagar, police said they had arrested four militants and foiled a plan to carry out grenade attacks in Srinagar.
"Police recovered four grenades from them and they have confessed they were planning attacks in Srinagar," a police spokesman said.
The level of violence in the region has declined sharply since India and Pakistan, whose territorial dispute over Kashmir has triggered two wars, embarked on a peace process in 2004.
The peace process was suspended in the wake of the militant attacks last November on India's financial capital Mumbai in which 166 people died. Link...