A local official, Waheed Khan, says the civilians were killed when an Indian artillery shell hit the bus in the Neelum Valley Wednesday.
The Pakistani army says troops are firing back on Indian military positions. There has been no immediate comment from India, the Associated Press reported.
Pakistan and India have been trading fire recently in the Himalayan region, which is divided between the two nuclear-armed neighbors and claimed by both in its entirety.
This week, at least 11 people were killed on both sides.
Tensions have intensified since militants attacked an Indian army base in Kashmir in September. India alleged the militants were supported by Pakistan, charges denied by Islamabad.