how to fix Heating issue of 7805?
Making heat is how the 7805 works.   

It is a dissipative voltage regulator.   That means it sits in series with the load, and is more or less a variable resistor, making resistive heat so as to make the output voltage 5v.   

If you input 12V, it causes a 7 volt voltage drop by making heat.

In your case that would be 7 volts x 125ma or 875mw, plus its own internal usage/heat    Almost a watt of heat!  More than your load is using.   If you are on batteries it is wasting 7/12 of your battery capacity.   

However it is simple and cheap.  That's what makes 7805s special.