During magnetic inrush or over-excitation, saturation of the core in a transformer draws a large exciting current, which can cause mal-operation of a differential relay. This paper proposes a modified current differential relay for transformer protection. The relay calculates core-loss current from the induced voltage and the core-loss resistance; the relay calculates the magnetizing current from the core flux and the magnetization curve. Finally, the relay obtains the modified differential current by subtracting the core-loss and the magnetizing currents from the conventional differential current. Comparison study with the conventional differential relay with harmonic blocking is also shown. The proposed technique not only discriminates magnetic inrush and over-excitation from an internal fault, but also improves the speed of the conventional relay.