In the context of fast depletion of fossil fuels and increase of pollution levels with conventional fuels, the search for alternate fuels has become pertinent. Alcohols and vegetable oils are probable means to replace diesel fuels as they are renewable in nature. However, use of alcohols in internal combustion engines is limited, as the properties of alcohol fuels are not compatible with diesel fuels. Hence much emphasis is given to the non-edible vegetable oils as alternate fuels in internal combustion engines. However, the drawbacks of low volatility and high viscosity associated with non-edible vegetable oils call for hot combustion chamber, provided by low heat rejection diesel engine. The crude vegetable oils are converted into bio-diesel by the process of esterification, to reduce the molecular weight and viscosity of crude oil. The investigations are carried out on low heat rejection diesel engines which consist of different degree of insulations such as i) air gap insulated piston with superni crown, air gap insulated liner with superni insert and ii) air gap insulated piston with superni crown, air gap insulated liner with superni insert and ceramic coated cylinder head with esterified pongamia oil (bio-diesel) with varied injection pressures. Performance is improved with high degree of insulation with vegetable oil in comparison with conventional engine with pure diesel operation