Aurangzeb Khattak, a police officer, said the shooting occurred overnight on Wednesday. He said passengers in a 4WD vehicle first harassed the group by throwing rotten eggs at them and then opened fire, resulting in the death of Chanda Sharmeeli.
Shell casings from a 9mm pistol were found at the scene and that investigators were using surveillance camera footage to trace the 4WD vehicle and arrest the culprits he added.
"And as anyone who is being forced to do something, she [Sharmeeli] retaliated and was shot for it," she said, adding that most likely the assailants were from "important families".
"It's time a lesson is learnt, people from big families can't just get away with everything. This society may have found tolerance, but there is no acceptance for the transgender."
The body has been identified and handed over to the family.
Transgender people are known as Khusra or Hijra in Pakistan. In conservative South Asia, where sexual relations outside marriage are taboo and homosexuality is illegal, they are often treated as sex objects and often become the victims of violent assault.
Last week, provisional results from Pakistan's census showed that at least 150,000 people identified themselves as transgender in the country's first official population count since 1998.

Transgender citizens were granted full inheritance rights by the Supreme Court in 2012, and the right to vote a year earlier.
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"On one side you have the Supreme Court rulings where transgenders are to get passports and CNICS, and on the other hand police stations don't even have a special help desk for them," Rana Asif Habib, president of the Initiator Human Development Foundation (IHDF), said.
"Most transgenders can't even file police reports because they don't have identification, and when they go to police stations they are teased ridiculed."
In June, the country issued its first third-gender passport to a transgender activist from the northern city of Peshawar.
In 2009, Pakistan became one of the first countries in the world to legally recognise a third gender, allowing those identifying as neither male nor female to obtain national identity documents.