In almost all cases, new material that you install should go into the “local” tree of your (La)TeX installation. (A discussion of reasons not to use the local tree appears below.)
On a Unix(-alike) system, using texlive or teTeX, the root directory will be named something like /usr/share/texmf-local/ or /usr/local/share/texmf/ You can ask such a system where it believes a local tree should be:
the output being the actual path, for example (on the workstation this author is using today):kpsewhich -var-value TEXMFLOCAL
In a MiKTeX installation, the location will in fact typically be something you specified yourself when you installed MiKTeX in the first place, but you may find you need to create one. The MiKTeX “Settings” window ( Start→ Programs→ MiKTeX→ Settings) has a tab “Roots”; that tab gives a list of current TDS roots (they’re typically not called texmf-anything). If there’s not one there with “local” in its name, create an appropriate one (see below), and register it using the window’s “Add” button.
The MiKTeX FAQ suggests that you should create “C:\ Local TeX Files”, which is good if you manage your own machine, but often not even possible in corporate, or similar, environments — in such situations, the user may have no control over the hard disc of the computer, at all.
So the real criterion is that your local tree should be somewhere that you, rather than the system, control. Restrictive systems often provide a “home directory” for each user, mounted as a network drive; this is a natural home for the user’s local tree. Other (often academic) environments assume the user is going to provide a memory stick, and will assign it a defined drive letter — another good candidate location. Note that the semantics of such a tree are indistinguishable from those of a “home” TEXMF tree.
You might not wish to use the ‘local’ tree:
The reason one might place upgrades the distribution’s main tree is to avoid confusion. Suppose you were to place the file on the local tree, and then install a new version of the distribution — you might have an effect like:
If you install in the local tree, the only way to avoid such problems is to carefully purge the local tree when installing a new distribution. This is tedious, if you’re maintaining a large installation.