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Fuel economy is becoming one of the key parameter as it does not only account for the profitability of commercial vehicle owner but also has impact on environment. Fuel economy gets affected from several parameters of engine such as Peak firing pressure, reduction in parasitic losses, volumetric efficiency and thermal efficiency. Compression ratio is one of key design criteria which affects most of the above mentioned parameters, which not only improve fuel efficiency but also results in improvement of emission levels. This paper evaluates the optimization of Compression ratio and study its effect on Engine performance. The parameters investigated in this paper include combustion bowl volume in Piston and Cylinder head gasket thickness as these are major contributing factors affecting clearance volume and in turn the compression ratio of engine. Based on the calculation results, an optimum Compression Ratio for the engine is selected.