Police opened fire when the accused tried to escape after attacking escorts while being brought to Hyderabad for a court hearing. The incident occurred between Aler and Jangaon, about 80 km from Hyderabad.
Vikaruddin and his four associates are accused in the killing of two policemen.
They were arrested in 2010 after a series of attacks on police in Hyderabad and were lodged in Warangal Central Jail.
The incident occurred close on the heels of a gunfight in Nalgonda district on Saturday in which two SIMI operatives and a policeman were killed.
Telangana Police says all five terrorists killed on Tuesday had ISI connections and were working for SIMI.
The state has been under high alert after the news of suspected terrorists moving around in the state.
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