You should leave the file in source control. Otherwise you'll run into several issues:
- changes won't be versioned. 'nuf said.
- it can't be branched or merged, even though web.config is one of the files that's most likely to vary between parallel dev/test/production environments
- changes you make locally won't propagate to coworkers without manual workarounds
- developers setting up an environment for the first time won't get the file at all
- Team Builds won't contain the file, so neither will your deployments. (surely you're not deploying directly from the desktop?!)
Note that the state of individual files is stored entirely on the TFS server. ('tf properties' dumps this metadata if you're curious) Only projects & solutions have bindings actually written into the file. And even those are dummy entries that tell VS "don't worry about me, just ask TFSProvider, it'll know who I am and where I'm supposed to be." While there are many other quirks in the VS project system that give me endless headaches, in this case it's your friend. Don't circumvent it.
Best options:
Edit your build script to toggle the read-only attribute before/after modification. If you're using the "copyifnewer.bat" script from the linked blog post, it should literally be one extra line. Even if you want to keep things entirely declarative within the MSBuild makefile, it's barely any work with the help of 3rd party tasks.
Use the File -> Source Control -> Exclude feature. After applying this setting, the file remains under source control, but will no longer be subject to automatic checkouts/checkins by the active solution. In other words, you can edit the file locally to your heart's content without affecting anyone else, but if you want to commit (or shelve) your changes you'll need to do it from Source Control Explorer or the command line.
Option #1 has the advantage of being a very quick fix for your existing setup. The downside comes from maintaining several copies of web.config.* Same reason why copy/pasting code is bad: if you change one, you have to go change all the others -- or worse, forget and let them drift out of sync until strange bugs force you to revisit the issue. This could be improved by changing the process so that there's only 1 "master" web.config and the additional copies only contain differences (via a textual diff engine, XSLT transforms, programmatic manipulation in Powershell, etc). Of course, that's more work.
Option #2 avoids #1's problems with very little overhead. (the engineering process itself is unchanged; only difference is how the Visual Studio UI behaves) This advantage is critical if you make changes to web.config at all frequently. Downside is that there is no built-in way to track variations on the "master" file. If the only diffs are dirt simple, eg a connection string or two, you may find it easiest to stick with just one "master" and let people make ad hoc changes on their dev machines. There are even tools to do this for you, such as Web Deployment Projects (easy) and the IIS Deployment Tool (complex). In any case your actual deployment should be automated and source-controlled, of course! If heavier customizations are required than these tools are capable of, then you'll probably want the hybrid master + transform approach described earlier.