A novel line pilot differential protection principle based on the virtual impedance of fault component is proposed in this paper. First, according to the fault component of the measured current and voltage at both line ends, the fault component of the current and voltage at the line midpoint is calculated. Second, the virtual impedance is defined as the calculated voltage fault component divided by the calculated current fault component. And then, according to the two virtual impedances calculated at two line ends, the ratio restraint criterion is formed with the sum of the virtual impedances and the smaller virtual impedance. Finally, by analyzing different characteristics of the criterion in different fault cases, the fault can be identified. Simulation results verify that the proposed method is able to identify different kinds of fault accurately with high sensitivity. It is highly reliable and not affected by the fault location, transition resistance, load current, distributed capacitance, and data synchronization. Even in the case of transitional fault, selectivity can still be guaranteed with the proposed method.