The use of water-in-diesel emulsion fuel has a potential to reduce the emissions of oxides of nitrogen (NOX), particulate matters, and total gaseous hydrocarbons in diesel engines. Physico-chemical properties, combustion, and performance characteristics are the critical factors to implement water-in-diesel emulsion fuel in diesel engines as fuel. In the first phase of this study, it has been observed that the concentration of water in excess of 10% in diesel fails to meet the standard diesel fuel properties requirement to use as fuel in existing diesel engines. In the present study, combustion and performance characteristics of water-in-diesel emulsion fuel (0, 5, and 10% of water-in-diesel) are studied in variable compression ratio (15 to 18), single-cylinder four-stroke diesel engine. From the results obtained, it is noted that the emulsion fuel combustion parameters (in-cylinder pressure, net heat release rate, and mass of fuel burned with respect to crank angle) are comparable with base diesel for the compression ratios of 18 and 17 at all load conditions. At low compression ratios (15 and 16), emulsion fuel combustion parameters lead to incomplete combustion and rough engine operation. In addition, significant improvements are found in brake specific fuel consumption and brake thermal efficiency for water-in-diesel emulsion fuels.