She is set to give her crown to another beauty queen, Daisy Bell.The footage which made her change her mind showed Jai wearing a pair of boxer shorts.
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"The documentary showed her living as a gay male in her boxer shorts.
"Underwear is very important to transgender females - one of the first thing people do is change their underwear as it makes us feel like we are finally a woman.
"When I confronted her, she just said that I didn't have a leg to stand on and it is difficult.
"It is basically one transgender person saying to another 'You're not transgender enough to be in our competition'.
It sounds daft when you put it like that." The main prize for the competition, which sparked controversy when it was awarded last year, was to have £10,000 worth of surgery in India.
But Jai says she has returned the prize and is instead awaiting gender reassignment treatment in Scotland.
There was also a £5,000 cash prize for the winner, as well as a £3,000 modelling contract which has now been awarded to Daisy, 23.
Jai, from Walkerburn in Peeblesshire, Scotland, insisted: "I am transgender.
"It seems to me that Rachael has based [her claims] on her subjective opinion from having viewed the documentary Miss Transgender, which is yet to be aired.
"I gave consideration to sharing a letter from my doctor on my gender dysphoria [the feeling your psychological identity as male or female is opposite to your biological sex] but decided against it.
"The documentary clearly shows me living full time in my community functioning on a daily basis interacting with family, friends and others in my desired gender role. There are many of us in it and we are all different from one another." Rachael said: "When Jai entered the competition, she said she was full time and she is not - she is a drag queen.