Hi,
I just tested the lab and was able to connect to SQL Server using localhost without any issues. I'm unsure what is happening in your case; perhaps the SQL Server service hadn't started up yet when you attempted to connect.
What I would recommend is to launch a fresh lab VM and try it again. If you get the same error, try right-clicking on start -- Run, enter services.msc, press enter, scroll down to SQL Server (MSSQLSERVER), right-click on it and choose Start.
Once it says Running, try to connect again via Power BI as per the instructions.
Should i have to extract the zip file to any specific location in my PC.
You should right-click on the 01-prepare-data.zip file in the Downloads folder, choose Extract All... and click Extract. Where you extract the files to will not affect your ability to connect to SQL Server via localhost, however, I think it is best to extract the files in the Downloads folder to match the exercise instructions.
Please click Accept Answer and upvote if the above was helpful.
Thanks.
-TP