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Please someone help me to understand what are all the approaches to create a custom application/SharePoint template with customised functionality in SP 2013 for intranet, which is the best one?

user will select my custom template from the list (as shown in below) to create a new site. enter image description here

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Your question is slightly loaded and general, thus I can only give you a general answer as well. I only know of 2 ways to create a custom site template in SharePoint on-premise:

  1. Using the OOTB SharePoint feature "Save as Template". This is my recommended approach as this is simple and should satisfy most requirements out there.

    • Basically you just build a site upon a OOTB Site template and add/modify all your business requirements onto the site. Once you are done, you simply create a site template from this site which then can be used to create other sites that will have the same content and features.
    • This new template would be listed in the "Custom" tab when choosing a template to create a site.
    • There are some caveats to this depending if you have custom developed solutions, apps, etc on this template.
    • More info about this can be found here (SharePoint 2013 is basically the same)
  2. Using Visual Studio to create a Site definition solution. This approach provide the most flexibility and customization possible BUT

    • Requires extensive knowledge on SharePoint development. (There are full time jobs just to be a SharePoint developer)
    • Requires a SharePoint development environment which is costly, complicated and is high maintenance.
    • More info about this can be found here

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