Chilli, an important commercial crop, is recalcitrant to in vitro regeneration. In the present study, an attempt has been made to optimize the in vitro regeneration of two chilli local cultivars, viz., G4 and LCA334, and transform G4 with a transcription factor dreb1A under the control of a desiccation inducible promoter rd29A, known to impart desiccation tolerance, using binary vector pCAMBIA 2301. Different phytohormones and their concentrations in MS medium were evaluated for in vitro response; 0.25 mg L-1 zeatin and 2 mg L-1 phenyl acetic acid (PAA) supported the highest regeneration rate (37.86%). Among the explants, cotyledonary leaf exhibited a higher (51%) regeneration response compared to that of hypocotyls (24.73%), and genotype G4 had better (33.80%) regeneration rate compared to LCA334. Rooting of the shoots was the highest in MS medium with 2 mg L-1 indole butyric acid (IBA) compared to other hormones. The presence of transgene was confirmed by polymerase chain reaction (PCR) and Southern blotting. The acclimatized transformants were grown in pots and screened for drought tolerance. Some of the transformants showed improved tolerance to drought by lower wilting compared to the control plants. The transformation and regeneration protocol described in the present study may help in optimization of transformation of chilli for agronomic traits of interest.