Advances Differential prot ecti on system is us e d t o protect most of the power transformers in power systems. The protection system is based on the differential currents/voltages of the primary an d secondary of the transformers under fault conditions and under normal operating conditions. The inrus currents or the magnetizing currents are generated in the transformer when it is switched on to the transmission system or the external fault in the system is cleared. The inrush currents other than the fault currents may activate the differential protection system if suitable blocking scheme is not incorporated in the protection system of the power transformer. Therefore, identification of inrush current and the fault currents is the key to improve the security of the differential protection scheme. This paper proposes the development of a new algorithm to improve the differential protection performance by using fuzzy logic and Clarke's transform. The result obtained concludes an effective method to differentiate the different internal faults with accuracy as well as shows an improvement in the time taken to detect faults