This rule shall be applicable for NRIs and not for the foreign citizens.
If you do not deduct 20% tax from the sale consideration amount you would be held liable to pay the same to the government along with the penalty at a later stage.
As per Aadhaar Act, 2016, NRIs/PIO/OCI card holders are eligible for enrolment of Aadhaar card only if they reside in India for over 182 days in the last twelve months immediately preceding the date of application for enrolment.
The Overseas Citizenship of India (OCI) is an immigration status permitting a foreign citizen of Indian origin to live and work in the Republic of India indefinitely, but this shall not entitle the foreign citizen to become resident Indian to claim the said privileges.
You demand the documents from him to prove that he is an Indian citizen.
As per the provisions of section 5(1) (g) of the Citizenship Act, 1955, a person who is registered as an OCI for 5 years and is residing in India for 1 year out of the above 5 years, is eligible to apply for Indian Citizenship.
Hence you ask him to prove that he is an Indian citizen
An OCI is entitled to life long visa with free travel to India.
an OCI is exempted from registration with Police authority for any length of stay in India.
An OCI will not be given Indian passport. Indian Passports are given only to Indian citizen.
Therefore if he is claiming to be an Indian citizen, ask him to produce the Indian passport, if he is not able to produce the Indian passport confirming that he is an Indian citizen, then you may have to treat him as a foreign citizen irrespective of his long stay in India.
Accordingly you may have to deduct TDS at the rate of 20% from the sale consideration amount, let him claim refund afterwards.