I am setting VGS=VDD, VDS=0.2*VDD ( as Ron is the on resistance of MOSFET when device is in triode/linear region) and measuring "Ron" as Ron=VDS/Ids.
Is this approach fine enough to get the Ron value?
Yes, you apply max (nominal) voltage to the gate, Vgs, and small (usually 100 mV or 50 mV) voltage to the drain, Vds.
Rdson = Vds/Ids.
If you are doing it in simulation, you should not worry about self-heating.
If you are doing measurements, beware of self-heating that might affect Rdson device or even burn the device (use pulsed measurements).