The death toll from the crash of an Indonesian air force plane packed with military personnel and their families rose to 142 Wednesday, as witnesses described people fleeing the disaster zone covered in blood with their clothes alight.

The Hercules C-130 transport plane crashed into a residential area of Medan on Tuesday, shortly after taking off from an airbase in the city on Sumatra island.

Buildings were severely damaged, cars reduced to flaming wrecks and the plane itself was almost completely destroyed, with the mangled tail the only part of the 51-year-old aircraft still recognisable after the disaster.

Many of those on board the flight to an island off Sumatra, which was carrying 122 people, were believed to be servicemen and women and their families.

But the air force has repeatedly revised up the number of people on the plane -- it initially indicated there were only 12 crew -- raising questions about poor management and whether there were paying civilians on board in violation of military rules.

As more bodies were pulled from the rubble and taken to hospital, police put the total death toll at 142, indicating a growing number of fatalities in the neighbourhood where the plane crashed.

New witness accounts emerged of terrifying scenes, with one man describing how the plane flew low and then smashed into a building, producing "flames as high as four storeys".

"Everyone panicked and screamed," Tumpak Naibaho, a 27-year-old tyre repairman, told AFP, adding there were hundreds of people in the area when the crash happened around midday.

"I thought it was a terrorist attack or something... I saw one man whose clothes were on fire, staggering out of the debris. His face was covered in blood, dust and ash."

"I had never felt so scared in my life, I thought I was going to die," he added.

People in the area said several buildings were thought to have been destroyed in the crash, with officials saying that the plane hit a massage parlour and a hotel.

Buildings ruined, cars destroyed

Rescuers were Wednesday continuing to clear debris, which spread over a large area, helped by two earthmovers, as hundreds looked on.

One end of a three-storey building had been left in ruins, with the walls blown away, leaving only the soot-blackened interior visible. An overturned, destroyed car could also be seen among the debris.

An army officer involved in the recovery effort said many bodies were found in pieces.

Claims emerged that civilian passengers other than armed forces' families may have been on the plane to Bintan island, close to Singapore, and had paid to travel, with the Jakarta Globe reporting that the military was investigating the allegations.

The armed forces are not supposed to accept payments to transport people who are non-military personnel on their planes, although it is common for civilians to travel on air force jets to remote parts of Indonesia, a vast archipelago of more than 17,000 islands.

Tuesday's accident was the sixth deadly crash involving an Indonesian air force plane in the past decade, according to the Aviation Safety Network, and prompted Indonesian President Joko Widodo to call for modernisation of the military's ageing equipment.

"I have ordered the defence minister and the armed forces chief to conduct a fundamental overhaul of the management of the military's defence equipment," he said.

Indonesia also has a poor civil aviation safety record -- the latest disaster came just six months after an AirAsia plane crashed into the Java Sea, killing all 162 people on board.

Officials were working to identify the victims so far recovered, with police saying that 62 people, mostly armed forces members, had been identified.

It is not clear what caused the crash but the aircraft asked to turn back just after take-off and the air force has said it may have suffered engine trouble.

Medan, with a population of around two million, is the biggest Indonesian city outside the main island of Java and a major economic centre.

It was the second time in a decade that the city has suffered a fatal plane accident. A Mandala Airlines domestic flight crashed shortly after take-off in 2005, killing at least 150 including passengers, crew and people on the ground.

That crash happened on the same street as Tuesday's disaster -- Jalan Jamin Ginting.