When the British Crown partitioned British India and granted independence to the new Dominions of India and Pakistan, more than a third of the subcontinent was still covered by princely states, with rulers whose position and status within the Indian Empire had varied. In 1947 there were more than 560 such princely states in India, over which the British Crown had suzerainty but not sovereignty. In 1947, princely states numbering 555 covered 48% of area of pre-Independent India and constituted 28% of its population. Relations with them were determined by subsidiary alliances and other treaties establishing indirect rule. A protocollary system of gun salutes also determined the ranking of about 120 major states (Pakistan included), most however were minor/petty 'non-salute states'. By the Indian Independence Act 1947 the Crown abandoned its suzerainty, leaving the rulers of the states free to choose to accede either to India or to Pakistan or to remain fully independent. Most had been so dependent on the Government of India that they had little choice about accession. By the eve of independence, most of the non-Muslim states had signed Instruments of Accession to India, but only one to Pakistan. Only a few states held out for complete independence after the British left India. Due to the diplomacy of Vallabhbhai Patel and VP Menon, Travancore, Bhopal and Jodhpur signed the Instruments of Accession before 15 August 1947. Even after independence three states vacillated, namely Jammu-Kashmir, Junagadh and Hyderabad which were integrated later.
The Instruments of Accession needed the states to only cede defence, communications and foreign relations to India. Democratic institutions were introduced in these states and it was only in 1949 that they were fully merged with India to form new states. Thus Travancore, Ambliara, and Cochin merged into India and formed the new state of Thiru-Kochi. Although in 1947 the royal families had been allowed to retain large sums of money as their Privy Purse, in 1949 with the states and its revenues being entirely taken over by the Government of India, it was the Indian Government that provided the rulers and their families with Privy Purses that were determined by several factors such as the state's revenue, whether the state had been ranked as a salute state under the British Raj or not, antiquity of the dynasty, and so on. Dewan Jarmani Dass of Kapurthala says:
||Thus the rulers surrendered their sovereignty and as a quid pro quo they were granted handsome Privy Purses and other privileges.
As defined from 1949 under Article 291 of the Indian Constitution, a privy purse would be a fixed, tax-free sum guaranteed to the former princely rulers and their successors. The sum was intended to cover all expenses of the former ruling families, including those incurred for religious and other ceremonies, and would be charged on the Consolidated Fund of India. With India remaining a member of the sterling area post-Independence, and with the Indian rupee remaining pegged to the British pound sterling, the privy-purse payments constituted a significant outlay of government funds.