Bring a small saucepan of water to a boil over medium heat. Add chopped onion; cook until soft, 4 to 5 minutes. Drain and allow onion to cool completely. Transfer to a blender and puree until smooth.
Heat oil and butter in a saucepan over medium heat. Add onion puree and ginger-garlic paste; cook and stir until fragrant, 3 to 4 minutes. Stir in tomato puree, chile powder, and turmeric; cook until oil separates from the mixture, about 5 minutes. Add milk, paneer, sugar, fenugreek, and salt. Simmer until flavors combine, 2 to 3 minutes.