2. <Domain>/<Group> is part of "Log on as a service" policy instated of <Domain>/<Service Account>.
3. As account is part of group, i have proceeded by selecting yes on the warning message and IAAS installation is failed.
could anyone confirm that account has to be in the "Log on as a service" policy.
Yes, you need to directly grant your service account the required permission there. It is not inherited from a group, if I recall.