An Azure VM's password can be reset from the portal. It can also be changed inside the VM(After logging in ->Change Password). When I did the latter way , I was not able to login. Why is that? What is the right way to do it and what is the difference?
There is no difference, as you mentioned we can reset the password from portal as well as from inside the VM after logging in, it will allow you to connect with out any issue. if you use azure portal to reset the password or reset configuration. it uses the VMAccess extension to reset the built-in administrator account and reset the Remote Desktop service configuration.