What is the proper way to install windows on the house that is not level
Installing opening windows out of plumb (out of level), will make them hard to open and close, and may affect their ability to seal well. If the windows are fixed, this is less of a problem.

If you install them level, the most noticeable issue will be the top and bottom, probably not the sides. You can address this by being creative with casings, the molding around the windows. If you put a shallow triangular pediment across the top, it will mask the angle difference between the window and siding.



An alternative is a curved facia board at the top, or any other combination that breaks up the horizontal line.

The bottom could be handled similarly, but there is less tradition of decorative moldings or pediments at the bottom of things. A straight, stepped molding might also break it up.



SUPPLEMENT: Based on the additional information, 1/8" in one foot is not a lot of lean. I would still hang them plumb and mask it with the moldings. You could rip cut the molding on a slight angle to split the difference. Also, having the moldings NOT end at the edge of a siding board makes variances harder to notice.