I have a 2001 XJ. I just lifted it around 3.5 inches. Probably stands a little taller because it was new everything. I never dropped the transfer case, I didn't get an SYE kit. When I accelerate everything sounds fine but when I decelerate, usually while still Applying gas it grinds. Sounds like transfer case or drive shaft. Idk what to assume but I'm gonna do the transfer case drop and see what happens unless told otherwise. Any help is appreciated thanks!

 

Your pinion angle is off and the sound you hear is your u-joints binding. You will need to do a TC drop or SYE and shims. I have the same things after my 3.5 inch lift (1999). I got and advanced adapted SYE and a new drive shaft from tom woods. Works great.