Take a sauce pan and pour 1 lt milk and turn on the heat. With a spatula stir occasionally so the milk doesn’t stick to the bottom. Let it come to a boil then turn off the heat. Mix the vinegar with equal amount of water and slowly pour it into the milk and watch how it starts coagulating. In 2-3 minutes you will find the whey separating from the chhana. Stir gently. In a strainer, place the cotton cloth and pour the chhana. You can save the yellow water for other use (such as kneading flour, making soup etc). Now wash the chhana with cold water and secure the cloth with a knot. Place it on a flat area preferably in the sink and put some heavy object like a cast iron pan or a gallon of water on top of it to discard the water for around 30 minutes. You can also hang the chhana (wrapped in the cloth) for 30 minutes instead of putting a heavy object on top of it.
You have now made soft paneer or chhana!