Is it permissible for a Muslim to believe that Allah is in the sky in literal sense?
No. The literal sense of being "in the sky" would mean that Allah is actually in one of His creatures, for the sky is something created. It is not permissible to believe that Allah indwells or occupies (in Arabic, hulul) any of His creatures, as the Christians believe about Jesus, or the Hindus about their avatars.
What is obligatory for a human being to know is that Allah is ghaniyy or "absolutely free from need" of anything He has created. He explicitly says in surat al-Ankabut of the Qur'an,
"Verily Allah is absolutely free of need of anything in the worlds" (Qur'an 29:6).