The coupled tanks system is a widely used nonlinear system for testing control and estimation methods. This system has various applications such as wastewater treatment, water desalination, pharmaceutical industries, and petrochemical plants. Among the challenging problems is the water level estimation which is needed for controlling the system. In this paper, a high-gain like observer is proposed for the estimation of the water level from delayed output measurement. This observer tolerates a larger bound of the time-delay compared to that obtained by using standard high-gain approach. We show the effectiveness of such observer design and how the standard approach fails to reconstruct the water level in the tanks in the presence of a larger bound on the time-delay.