In a televised ceremony, Indonesian Army Chief General Ryamizard tore the badges of rank from the men's uniforms.
He said the soldiers had "embarrassed and sullied the face of the Indonesian armed forces". 
The BBC's Jakarta correspondent, Richard Galpin, says the men are likely to face trial for murder.
More than 100 soldiers from an airborne battalion attacked the police post on the island of Sumatra on Sunday night with rifles, grenades and mortars.
Four Indonesian policemen were reported to have been shot dead in a fierce battle which lasted several hours.
Local newspaper reports said the death toll could be as high as eight, including two civilians. At least 24 people were injured in the fighting.
A police spokesman said the soldiers attacked after a police officer arrested a soldier accused of selling drugs.
Police spokesman Amrin Karim said 61 people who had been under detention in the police station escaped during the fight, which took place near the city of Medan, 1,350 kilometres (840 miles) north-west of the capital Jakarta.
"This is not the first time that soldiers have attacked the police. Last time it was over a soldier's arrest for gambling," he said.
Lack of discipline
The Indonesian army, the country's most powerful institution, has been regularly accused of human rights abuses and indiscipline.
It has also been accused of using its muscle to protect business interests it has developed to make up for shortfalls in the government's military budget.
Our correspondent says about two thirds of the military budget is funded through both legal and illegal businesses. It is widely believed the armed forces are involved in a variety of criminal activities, including drugs, illegal logging and smuggling.
Relations with the police have been particularly tense in some parts of Indonesia since the police, who used to come under the military's command, were given new powers.
The latest violence will be used by critics of the military as further proof it is being too slow to reform.
The military was widely blamed for being behind violence in the former Indonesian province of East Timor in 1999.
At least 1,000 civilians were killed in the lead up to and aftermath of East Timor's vote to become independent.
The violence led to a US ban on weapons sales and direct military assistance to Indonesia.
