I've heard from an English teacher, who's also a native speaker of English, that it is wrong English when we ask: How to say "Paani" in English? ("Paani" is a word of Indian language.) According to him, we should rather ask: How do I say "paani" in English? That kind of confused me. So, I want clarification on whether it is wrong or right and what the difference between the both phrases is.
Your friend is correct. To form this interrogative (question) structure, you reverse the word order and insert an auxiliary verb.
How do I do this? How can you say that? Where do I put this lamp?
Another way to understand why your rendering ("How to say Paani in English?) is not a sentence is to notice that it has no subject.
If you had said ""Can you tell me how to say..." or "Do you know how to say..," then it would have been a properly formed question.