Hi Maudasir and welcome to Windows 7 Forums
You can only have a maximum of 4 primary partitions on a Basic disk. Trying to create another partition will take it over this limit. The only way to do this previously was to make a maximum of 3 primary and 1 extended partitions. The extended partition acts as a container for 1 or more logical partitions, subject to system constraints (drive letter availability).
In older OSes prior to Vista, the only way to achieve this was to convert one of the existing partitions (usually the last listed on the disk) from primary to extended, a procedure that involved making a back-up of all information in the old partition, deleting the old partition and then recreating it as extended, followed by creating as many logical partitions as required subject to the constraints mentioned above, and finally copying the backed-up data back to one of the newly created logical partitions.
Since Vista, things have become easier and, as well as Basic disks (which are the default), you can also have Dynamic disks. You can either allow the system to do the conversion automatically, in which case the volumes (aka partitions) on the disk are converted to the appropriate type without loss of data, or you can convert the disk manually Convert a Basic Disk to a Dynamic Disk
I recommend that you allow the system to do the conversion automatically, as it will take care of everything for you. Should you have important data that you don't want to lose, back it up prior to converting the disk, whether you do it manually or allow it to be done automatically. We are not responsible for the loss of any data that may, or may not, occur during this procedure.