Acting on a tip-off, the team conducted the raid in the Pathan Colony neighbourhood of Ferozewala town, 18 kilometres (11 miles) north of the Punjab provincial capital Lahore.
"We had intelligence information about presence of suspected militants in a house and when a police party was sent there, the suspects opened fire at them," provincial home minister Shuja Khanzada told AFP.
"Three militants were killed and the fourth one blew himself up and two others were wounded and captured," he added.
"The group belongs to TTP (Tehreek-e-Taliban Pakistan)," Khanzada said referring to the umbrella Taliban militant group based in the northwestern tribal areas bordering Afghanistan.
Khanzada said police seized three suicide bombing jackets, one rocket launcher, five Kalashnikov rifles, a large cache of bullets and maps of important buildings during the raid.
Local police station officials confirmed the raid and casualties.
Pakistan's army says it has killed more than 2,700 militants since launching an offensive on the TTP's main base in North Waziristan tribal district in June last year, and destroyed more than 800 of their hideouts.