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The plane crashed in the suburbs of Mora Kalu village, killing 12 civilians and five crew members and destroying five to six houses, the Pakistan Army said.
It said that all five crew members, including two pilots, were killed and 12 others were injured in the accident.
District commissioner Rawalpindi Ali Randhawa told the media that the incident occurred between 2:30 to 2:40 am when a small military plane which was on a training mission crashed in Rawalpindi.
The dead and injured were shifted to various hospitals of Rawalpindi, where paramedics said most of the victims were badly burnt.
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The village where the plane crashed is located close to the posh area of Bahria Town. Soon after the crash, a massive fire broke out that engulfed several houses in the locality.
Some of the locals have also uploaded pictures of the burning houses on social media. Pakistan has a poor air safety track record, with plane and helicopter crashes occurring frequently over the years.
In 2016, a Pakistan International Airlines (PIA) plane carrying 48 people, including famous pop singer-turned-Islamic preacher Junaid Jamshed, his wife and Deputy Commissioner Chitral Osama Warraich, crashed and burst into flames in a hilly area near Abbottabad after facing engine problems.
In 2012, a Bhoja Airline plane, a Boeing 737 carrying 121 passengers and six crew members, crashed near Islamabad just just before touchdown.
The worst aviation tragedy on Pakistani soil came in July 2010 when an Airbus 321 passenger jet operated by the private airline Airblue crashed into hills overlooking Islamabad. The flight was coming from Karachi.
All 152 people on board were killed in the accident, which occurred amid heavy rain and poor visibility.
Another deadly civilian plane crash involving a Pakistani jet occurred in 1992 when a PIA Airbus A300 crashed into a cloud-covered hillside on its approach to the Nepalese capital Kathmandu, killing 167 people.