SnO₂ QDs based optical sensing is realized by exploiting its photoluminescence properties. Simple sol-gel wet chemical process is used for preparing metal oxide nanoparticle. Crystalline particles of average size of 2.3 nm, equivalent to Bohr exciton radius of SnO₂, are determined from transmission electron microscopy and X-ray diffraction studies. Prevalent defects, mainly oxygen are characterized using the Raman spectroscopy and photoluminescence measurements. Optical sensor study is carried out by measuring variation in photoluminescence with and without exposure of ammonia in the form of ammonia solution. The photoluminescence spectra of SnO₂ upon the UV (325 nm) illumination show a drastic increase in the intensity in the presence of ammonia. A non uniform response by different oxygen vacancies towards ammonia provides a new insight for the understanding of the gas sensing mechanism. A good selectivity in sensing for ammonia is also been recorded by repeating the experiment with acetone.