Diagnosis of electrical equipment, particularly n and power transformers has been quite important for quite a long time. Frequency Response Analysis (FRA) has been introduced years ago and has been employed as an off-line diagnosis test since last decade to investigate transformer mechanical integrity. As smart high voltage monitoring concept is under developing, on-line transformer winding deformation diagnosis has been investigated and discussed significantly over the last years. Hence, on-line diagnosis method implementations have become important accordingly. This study has concentrated on issues arising while on-line FRA is going to be employed on transformers. Existing off-line and on-line transformer winding deformation diagnosis methods are discussed and an on-line frequency response analysis measurement setup is proposed. A profound insight to the challenges associated with on-line FRA measurement has been provided. Influence of on-line setup on frequency response trace sensitivity, accuracy and interpretation has been highlighted. In the end, practical study has been performed on a 66 kV interleaved winding connected various types of capacitive bushings to explore the boundary condition for on-line FRA setup design and to address fundamental challenges.