This paper proposes a percentage current differential relaying algorithm for bus protection using an advanced compensating algorithm of the secondary current of current transformers (CTs). The compensating algorithm estimates the core flux at the start of the first saturation based on the value of the second-difference of the secondary current. Then, it calculates the core flux and compensates distorted currents using the magnetization curve. The algorithm Is unaffected by a remanent flux. The simulation results indicate that the proposed algorithm can discriminate internal faults from external faults when the CT saturates. This paper concludes by implementing the algorithm into a TMS320C6701 digital signal processor. The results of hardware implementation are also satisfactory. The proposed algorithm can improve not only stability of the relay in the case of an external fault but sensitivity of the relay in the case of an internal fault.