Security and government officials have said 13 members of the region's predominant Konyak tribe and one security trooper were killed on Saturday after the forces in the border state mistook a group of labourers for militants and opened fire.
Another member of the tribe was killed during protests on Sunday over the killings, which has prompted the government to launch an inquiry, while police and officials ramped up patrols ahead of the last rites.
Hundreds of mourners laid wreaths on the coffins of the dead, lined up on a playground, as the state's chief minister, Neiphiu Rio, led a mass funeral service in the district of Mon, the site of the incident.
"The killing of innocent civilians is terrorism, we are Indians, not terrorists," read a placard nearby.
Home Minister Amit Shah, speaking in parliament, appealed for peace in Nagaland. He said the government "expresses remorse" as civilians lives were lost when security forces were trying to ambush insurgents.
Shah said an investigation had been ordered to identify loopholes in the security strategy at a time when hundreds of members of the security forces are patrolling Mon district.
"Such misfortunate incidents are being investigated by the army at the highest level," he said.
The army expressed "deep regret" over the intelligence lapse but residents have demanded a shutdown of its operations, with army camps moved out of civilian areas.
Police registered a complaint against a paramilitary unit over the incident, saying there had been no police guide nor a request for one from security forces.
"It is obvious that the intention of security forces is to murder and injure civilians," they said in the complaint, reviewed by Reuters.
Feelings are running high in Nagaland, where people have often accused the security forces of wrongly targeting villagers in counterinsurgency operations against rebel groups under a law known as the Armed Forces Special Powers Act (AFSPA).
Besides sweeping powers of search and arrest, the law, enforced in parts of four of the seven northeastern states, allows security forces to open fire to maintain public order in areas designated "disturbed areas".
Nagaland is covered by the law as India says rebel groups operate in forests that spans the neighbouring states of Manipur and Arunachal Pradesh. All three states border Myanmar.
However, Neiphiu Rio called the law draconian and urged its removal.
"Today, the whole world is criticising AFSPA and now the Nagaland government wants AFSPA to be withdrawn," the chief minister said.