Symlinking /User/SpecialFolder to different drive creates Folder in Folder
This occurred because you already had something in your home directory called "Downloads" - the ln command is smart enough not to write over it, so instead created the symlink within it.

If you're starting from scratch you can mv ~/Downloads ~/Volumes/Data/; if you've already successfully copied your Downloads directory you can simply delete the old one in your home directory: rm -Rf ~/Downloads.

After that your original ln command should work. You shouldn't need to prefix it with sudo:

ln -s /Volumes/Data/Downloads ~/Downloads


Or, as fd0 suggested, instead of using rm you could use ln -s -f option to unlink the directory. Thus creating the desired results:

ln -s -f /Volumes/Data/Downloads ~/Downloads