The troops were searching for militants in Tizi Ouzou region, 75 miles east of capital Algiers, when they were attacked by al Qaida in the Islamic Maghreb (AQIM) fighters, the source said.
Another 11 soldiers were wounded, the source said.
The attack came just days after President Abdelaziz Bouteflika, 77, was re-elected for a fourth term following a campaign that portrayed the ageing leader as key to continued security for the North African OPEC state.
Since the end of its 1990s war with armed Islamists, attacks are rarer in Algeria. But Algerian officials are concerned about spillover from turmoil in neighbouring Libya where militants linked to al Qaida have sought refuge in the remote southern deserts.
In January last year, 40 oil workers at Algeria's Amenas gas plant died in an attack by Islamic fighters.