SQL Server Connection with On Prem gateway

 I can choose to install the onprem gateway software in the SQL server itself where I have my database hosted. 

That is not a very good idea. They will fight to the death and starve each other of memory and compute.  The gateway VMs (plural!!!) must be dedicated to just the gateway with nothing else running there.

The gateway VMs must have direct line of sight to the SQL server. They cannot manage VPN connections for you.

Hi hasarinfareeth,

Thanks for reaching out to the Microsoft fabric community forum.

You've already understood a lot of key points, and you're on the right track regarding the need for an on-premises data gateway to connect Power BI Service to your SQL Server. Let me clarify a few important things to help you make the best decision.
As already mentioned by lbendlin, it's possible to install the gateway on the same machine where SQL Server is hosted, but it's not recommended for production environments. SQL Server and the gateway both require significant compute and memory resources, and running them on the same machine can lead to performance issues or stability problems. For this reason, it's a best practice to install the gateway on a dedicated server or VM that runs 24/7 and has direct network access to the SQL Server. On VPN and Connectivity part the gateway needs constant, direct access to SQL Server, and it does not manage VPN connections. So wherever you install the gateway, that machine must be on the same network (or have a trusted, permanent route) to the SQL Server without relying on someone being connected to a VPN.
Coming to the firewall part, the gateway communicates with the Power BI Service using outbound internet traffic only. You don’t need to open any inbound firewall ports. Just make sure the machine running the gateway can reach Power BI and Azure services over TCP port 443.

I would also take a moment to thank lbendlin, for actively participating in the community forum and for the solutions you’ve been sharing in the community forum. Your contributions make a real difference.

If I misunderstand your needs or you still have problems on it, please feel free to let us know.  

Best Regards,
Hammad.
Community Support Team

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Thank you.