Hi Atul
You are correct, it's considered SEO best practice to host a blog on the main domain rather than a subdomain (No. 5 in http://www.seomoz.org/learn-seo/domain which I'm sure you've seen).
As for the naming of either 'Folder' or 'Sub-folder'; both are used and either one is appropriate, they are essentially the same thing.
To try to remove any possible confusion though, I tend to call a deeper part of a main site a Folder, whereas a deeper part of a sub-domain a Sub-folder. Thus keeping the word 'Sub' associated with a Sub-domain.
So I'd call www.example.com/blog a Folder and blog.example.com/news a Sub-folder.
Regards
Simon
