Burning of crop residues aggravates already existing pollution caused by coal‐based thermal power plants in most of the developing countries such as India. Crop residue consists mainly of organic compounds and can be efficiently utilized to produce biogas in a sustainable way through anaerobic digestion. This study proposes a microgrid (MG) system for the effective utilization of available renewable resources and reliable rural electrification. The detailed techno‐economic analysis of the design of a solar and biomass‐based MG system was performed. Two MG systems, namely, MG‐A having photovoltaic (PV), biomass‐based generating units, connected to an unreliable grid, and MG‐B having PV, biomass, and battery units working in the isolated mode, were designed for reliable rural electrification. Different performance‐assessment parameters such as generation responses, component cost, project feasibility, emissions, inflation rate, and fuel prices were taken into account during the investigation. This study concludes that a grid‐connected MG system is more capable of providing reliable electricity with reduced energy costs than an islanded MG system. In addition, the proposed MG power system helps to mitigate pollutant emission into the atmosphere by effectively utilizing the abundant biomass resources.