How to set TMPGEnc Encoder so that it preserve the ratio of the source by padding black bar around the surronding for the encoded file?

The resize/border problem should be managed outside tmpgenc (with an avisynth script) as tmpgenc results are very poor in the matter.

But if you want to do that, then you have to go to "Setting -> Advanced -> Video Arrange Method" and select "Full Screen (keep aspect ratio)".

You then have to set carefully the A/R of the source (just above in the same tab) and of the target (in the "video" tab).

so which software do you suggest as I am so new to these thing

This is not mandatory but if you learn about avisynth and how to use it to pre-process a source before to send it to the encoder (tmpgenc for instance) you wqill enhance really the result of what you are encoding.

Give a look there to learn the basis :
http://www.avisynth.org/index.php?page=YourFirstScript

Then you will be abble to go to the "optimal script" section of the forum where they are discussed how to use avisynth for our kvcd.

Assuming that your source is a DVD, this is what you should be doing:
1 - Rip and decrypt the DVD to *.ifo/*.vob using either DVDDecrypter or DVDFab Decrypter Free.

2 - Create a DVD2AVI project file (*.d2v) using DGMEPGDec.
Be sure you set it to "Audio>Output Method>Demux tracks" and then "Audio>Track number>the audio track number of your prefered language".
IIRC that will extract either an *.ac3, or an *.dts or an *.mp2 file.

3a - Write an Avisynth script (*.avs) using notepad.
or
3b - Use PARanoia to create an Avisynth script (*.avs) which is a lot easier than 3a.
PARanoia just takes care of the needed resizing of the video.
Later on you can take a look at some scripts in the Optimal Scripts area of the forum and tweak your Avisynth script (*.avs) made with PARanoia.

4 - Try to open the Avisynth script (*.avs) in your favorite media player (we usually advise Media Player Classic or VLC which are very good and free).

5 - If it plays with no "red" error messages, then load your Avisynth script (*.avs) in your favorite video encoder (we usually advise TMPGEnc 2.54.x or CCE or even the free HC Encoder).
Either choose 2-Pass VBR to hit the desired target size or the use CQ mode and use a prediction tool such as CQMatic/Calcumatic.

6 - After video is encoded it's time to author it (mux the video with the audio and add some menus). Use Muxman (no menus option in the free version) or TMPGEnc DVD Author (commercial and no subtitle options) or DVDLab (commercial but the best overall).
You'll end up with some *.ifo and some smaller than the original *.vob.

7 - Use ImgTool Classic to create an *.iso and use ImgBurn to burn the *.iso back to DVD5.

Most of the tools are easy to find using google.
But I suppose PARanoia and CQMatic/Calcumatic you'll just find it here at kvcd.net.
They have their own sections here at the forum .
Cheers

__________________
Rui