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Is there any way I can add azure database to sharepoint hosted app for free if not then paid ?

http://www.codeproject.com/Articles/695161/Walkthrough-Creating-a-O-SharePoint-App-wi

This project seems like embedding database into application, please tell me how ?

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No, you need to use Auto-Hosted (free azure storage) or Provider-Hosted (you are resp for creating the whole web application including storage).

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I think auto hosted apps are still in preview state so it is not recommended to use for production scenarios. The option we have now is Provider hosted app. https://officeams.codeplex.com/discussions/539315

P.S. I can't add as comment due to reputation limit.

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