The hugely popular Gen Raheel spoke at a colourful ceremony welcoming the incoming chief General Qamar Javed Bajwa at a stadium at army headquarters in the garrison city of Rawalpindi.
Gen Bajwa assumes command as Pakistan's 16th army chief
"Unfortunately, in recent months, increasing state terrorism in (Indian) occupied Kashmir, and India's aggressive steps have put the region's peace in danger," Sharif said.
"I want to make it clear to India that considering our policy of restraint a weakness would be dangerous for her," he said to applause.
"This is reality, that in South Asia, lasting peace and progress is impossible without solution of the Kashmir issue. For that, international community's special attention is necessary," he continued.
Tensions between the nuclear-armed neighbours India and Pakistan have spiralled following a deadly assault on an Indian army base in September that New Delhi blamed on Pakistan-based militants.
India said it had responded to the September attack by carrying out "surgical strikes" across the heavily militarised border, sparking fury from Islamabad, which denied the strikes took place.
There have been repeated incidents of cross-border shellings and gunfire from both sides since, claiming the lives of dozens of people, including civilians.
Gen Raheel Sharif: A life in pictures
Gen Raheel spoke Tuesday as Indian police said armed militants had launched a fresh attack near the border with Pakistan, killing two soldiers.
Officials said the attack took place in Nagrota in the northern state of Indian-held Kashmir, which has seen repeated outbreaks of cross-border firing in recent weeks, and blamed it on "terrorists".
Prime Minister Nawaz Sharif on Saturday named General Bajwa as its new military chief as Sharif stepped down from a three-year tenure, winning praise for respecting democracy even as many Pakistanis called for him to extend his term.
Military bands played as uniformed soldiers marched at the ceremony Tuesday, where the outgoing chief gives his wooden cane to his successor, symbolising the handover of power.
The Pakistani military plays an outsize role in national life, offering the armed reassurance against arch-rival India that many Pakistanis see as vital to their identity.
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