The men, killed in two raids on Sunday, had been targeting several locations in Bali, the chief of Indonesia’s anti-terror unit told the BBC.
Officers also seized firearms and ammunition on the island, where a bombing in 2002 killed more than 200.
They are thought to be linked to Jemaah Islamiah (JI), a regional militant group with al-Qaeda connections.
The group was responsible for the 2002 Bali bombings and has carried out attacks across South-East Asia.
Police said that splinter group carried out bank robberies in Medan, Sumatra in western Indonesia in 2010 and was also reportedly been responsible for setting up paramilitary training in Aceh and in Solo, central Java.
Indonesian police told the BBC the five men had been under police surveillance for a month.
They were planning to carry out robberies on the island to raise funds for terror related activities, police said.
Indonesia has struggled with home-grown extremism in recent years but has been relatively successful in stamping it out through the use of its elite anti-terror unit Densus 88, says the BBC’s Karishma Vaswani in Jakarta.
The two raids took place in Bali’s capital city, Denpasar and at a hotel in Sanur, a popular tourist district.
Three men were killed at the hotel and another two died in Denpasar.