Abstract The Diesel Generating set (DG Set) which uses diesel engine is gaining popularity in rural areas as it produces electricity for irrigation and agricultural purposes. But there are various losses associated with diesel engine which tend to reduce its efficiency and performance. Among these exhaust heat loss is major loss which contribute almost 33-36% and leads to the waste of heat which could be recovered and a considerable amount of primary fuel could be saved. The literature survey reviews that exhaust gases from diesel engine having heat potential that can be recovered. In the present paper attempt have been made recovering of waste heat energy of exhaust gas of diesel engine by placing specially designed heat exchanger just near the inlet and outlet duct of the engine so that energy from the exhaust can be used for preheating the air passed to the engine. A simple counter flow shell and tube type heat exchanger was designed and fabricated based on the output obtained from initial design. The experiments were conducted with and without out heat exchanger on vertical, single cylinder, 5 HP, cold start, water cooled, four stroke diesel engine working on high speed diesel oil. The diesel engine with incorporation of heat exchanger shows improved performance of engine and also shown reduction in smoke level.