There is something new from Gmail Lab feature. Now you can finally insert inline images into the body of the mail without having to use the attachment option. You can now put images exactly where you want them to appear instead of adding messages like “see attachment #1”. Just go to Settings > Labs and enable “Inserting images”. Once enabled, a new icon will show up in the rich text editor.

There are two ways to upload photos. You can choose to upload photos from your computer or providing the URL of the image.

As per Gmail’s Blog:

Well, it’s about time. You no longer have to use workarounds to put images into your messages or attach images when you really want to inline them. Just turn on “Inserting images” from the Labs tab under Settings, and you’ll see a new toolbar icon like this:

Make sure you’re in rich formatting mode, or it won’t show up. Click the little image icon, and you can insert images in two ways: by uploading image files from your computer or providing image URLs.